Procuring Protection from Fraud – latest findings and some useful tips

(We're pleased to feature a guest post from Pedro Paulo, CEO of eProcurement firm Gatewit.)

The commercial world may have changed a little in recent years, but the problems caused by corruption and graft still remain.

The first few weeks of 2014 saw the publication of several reports into corruption and fraud across the European Union. First we had the bi-annual Fraud Barometer report from KPMG which revealed that, although the volume of fraud cases is still uncomfortably high in the UK, the average monetary value of the fraudulent activity reduced from a mean of £6.1 million over the past five years, to £2.9 million in 2013. The second, more recent report, is the official EU Anti-Corruption report, which found that throughout the EU, corruption and fraud in all forms costs the collective economy approximately €120 billion a year (a shade under £100 billion).

Most recently we saw the publication of the PwC Global Economic Crime Survey 2014. The headline figure of note for UK businesses was that 44 percent of UK respondents had experienced some type of fraud, compared to just 37 percent globally. Worryingly this regular report has now included, for the first time, a metric purely for procurement fraud. According to PwC, 22 percent of the respondents in the UK had experienced procurement fraud, the second most common type of fraud globally, and coming a close third to cybercrime (24 percent) in the UK and asset misappropriation including employee embezzlement. Taking those two figures together leads to the realisation that a little over half of those who had been the victim of fraud in the UK were victims of procurement fraud.

With figures like these, it is clear that a healthy culture of fraud awareness should be of top importance to all businesses. The PwC report shows that most firms have at least made a start on this, with 83 percent of organisations having a whistleblower scheme in operation but, as a counterpoint to that figure, it also shows that 40 percent have not seen such schemes used in the past two years. Whether this means that those companies have not experienced fraud, have experienced it but seen it too late to report through this particular mechanism, or whether it means that suspicions simply weren’t reported, isn’t clear.

A visible scheme for reporting fraud is important in preventing loss and also building staff confidence in the company. There are more general ways to guard against fraud, and some highly effective measures that a company can put in place to reduce fraud in the procurement function.

Potential conflicts of interest and opportunities for collusion between staff and suppliers is an obvious potential source of fraud. Any external relationships between a supplier and a staff member involved in the procurement function should be declared at the start of the relationship and taken into account when allocating roles or making contract decisions to avoid possible fraud or even the appearance of potential collusion.

A less subtle form of fraud to watch out for is the diversion of funds in the payment stages. This can range from supplying false bank account details to posing as a company representative in order to pick up payment in person. The wide range is illustrated in an anecdotal story in KPMG’s study, in which an administrator processed cheques made out in disappearing ink, leaving her free to insert her own name in real ink.

The risk of this form of fraudulent activity can be minimised by regular attention from an auditor separate from the procurement function or even someone external to the company. The majority, nearly two thirds, of procurement fraud takes place at the payment stage and during contract maintenance stages, so these two areas should be put under particularly close scrutiny.

These are just a couple of the tips and methods that have been proven to work in combating the many different types of procurement-related  fraud. The most important action of all though is to create a culture of vigilance and openness about questioning suspicious practices. Working together as a company and as an industry, it will be made clear to fraudsters that they are being watched, and it’s likely a reduction in their nefarious activities will be marked soon after.

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