The Financial Cost of Fraud and Anti-Procurement Fraud Principles

The latest research from national audit, tax and advisory firm Crowe UK, together with the University of Portsmouth’s Centre for Counter Fraud Studies (CCFS), has revealed a “national fraud pandemic in Britain, totalling £110bn a year”.

The report, The Financial Cost of Fraud 2018 estimates that the UK economy could be boosted by £44 billion annually if organisations stepped up efforts to tackle fraud and error. It is not specific on how much of this loss – and potential gain - is procurement-related but it does mention in passing “a major mining company which reduced losses across its procurement expenditure by over 51% over a two year period”.

There is a lot of extrapolation in the report, inevitable given that much of the fraud is not directly detected, but it's worth reading. And it got us to dig out something we wrote a while back, which seems worth repeating (with a little updating), as it is just as relevant today. Part 1 here – two more to follow.

Anti-Procurement Fraud Principles – part 1

How can organisations stop procurement fraud, or at least make it as difficult as possible?

While there are a wide variety of frauds, there are a relatively small number of key principles that, if understood and acted upon properly, can make fraud at least more difficult. (It is never impossible)!  Some of the principles can also make it more likely that fraud will be detected, even if it hasn’t been cut off at source.

Fraud relies on extracting money from the organisation, either in return for nothing, or in return for less value than the money justifies. So the basic counter-fraud principles must be around controlling the flow of money out of the organisation, and ensuring that full value has been obtained for that money.

So here are our key principles for avoiding procurement-related fraud (we’ll discuss personal expenses, such as travel and related spend, separately at some point as it deserves an analysis of its own). We will describe broadly the principle and what needs to be done – but note at this stage we are not going to get into the full implications, or, for instance, the technology that might be used to counter fraudulent activities.

The six key principles are:

  1. It must be clear who is entitled to spend money in the organisation.
  2. Any expenditure committed must be authorised properly.
  3. All entities to which money is paid must be verified and authorised.
  4. Procured goods or services must be checked to ensure what was received (quality, quantity, etc) is aligned with the contract and payment.
  5. Supplier selection and pricing of purchased goods and services must be transparent.
  6. Opportunities for collusion between suppliers, and between suppliers and buyers, must be minimised.

If these are the key principles, then there is also an overarching need to codify the processes and the policies that are in force and followed in the organisation. So processes cover how procurement is executed; for instance, how a Procurement Card should be used, or the flow of requisitions and orders. Policies are the “rules” – so everything from the need to declare conflict of interest, to when a single tender can be used, to sign-off limits on invoices.

We’ll look at those six principles in more detail in part 2.

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