Features: December 9th, 2013

Despite procurement fraud being recognised as a growing risk to businesses, there are surprisingly few steps being taken to combat it argues Pedro Paulo. In his speech at the recent CIPS Annual Conference, fraud advisor Paul Guile warned that the full extent of fraud was unknown, a fact which can contribute to a lack of appreciation for the risks it posed.

Procurement fraud has hit the news recently with the publication of a number of reports highlighting the area and clearly spelling out the costs and risks involved. Business analyst house Kroll released its 2013 Global Fraud Report in October which contained some sobering figures related to corruption and fraud in procurement and the supply chain. Guile’s warning at the CIPS conference is given even more potency when we read in the Kroll report that 70 per cent of companies worldwide incurred losses as a result of fraud last year.

In June this year, the European Anti-Fraud Office (OLAF), in association with PWC, released its own report into fraud and corruption in public body procurement across eight member states in the EU. Its headline grabbing finding was that the overall direct costs of corruption in public procurement across the five sectors studied in the eight Member States is estimated to range from between €1.4 to €2.2 billion for 2010. These five sectors represent the capital investment heavy road and rail sectors, water and waste, urban and utility construction, training, and research and development.

The public sector is an area that may attract more corruption and fraud than others as there is, simply, more money flowing through in general than in the private sector. This may result in the sector being seen as an easier target than a smaller company that tracks its finances more carefully. This attitude cannot stand up to scrutiny when firms of all sizes are hit by fraud and corruption, not just those in the public sector. Size, from public body to sole trader, should not be an indicator of safety. However, the Kroll report shows that the overall proportion of budgets lost to corruption tends to be higher in smaller projects than in larger projects, precisely the sort of work a smaller business may be involved in.

Unfortunately for those specifically involved, the procurement function was the area identified by the Kroll report as being the category with the fastest growing rate of fraud and corruption. The number of companies affected has risen from 12 per cent to 20 per cent in 12 months. If we take fraudulent activity to fit into four broad categories as identified in the OLAF report (kickbacks, conflicts of interest, general mismanagement, and bid rigging) we can easily see the scope of options available to those out to defraud and understand why such a rise is possible. The same report found that of those four, bid rigging accounted for almost half (48 per cent) of all reported procurement frauds.

Know your adversary

When interviewed for the launch of the report, Tom Hartley, CEO of Kroll, pressed home the point that fraud and corruption in procurement is an often neglected area that deserves more attention within enterprises. He highlights the need for proper monitoring and reporting procedures within a company and presents some sobering statistics about who is involved in this type of activity: “Companies that suffered fraud and knew who was responsible reported that 32 per cent had experienced at least one crime where a leading figure was in senior or middle management, 42 per cent where it was a junior employee, and 23 per cent where it was an agent or intermediary.”

He mentions that even though fraudulent activity is most often discovered internally, companies have a tough time in admitting that there may be a problem internally. The research found that an officially delineated whistleblower scheme is unfortunately absent in the majority of companies, and only 52 per cent of companies have invested in staff training on fraud.

These internal transgressions may be difficult to spot either through siloed working practices where there is no visibility across the board by management or because of a canny fraudster who covers their activity well. One common example that can be seen throughout industry is when procurement personnel can make purchasing decisions biased toward a vendor in whom they have a financial or personal interest. This is most common when there are few checks on company backgrounds or a procurement process that is too opaque to observers.

This is in the same category as vendors enjoying inflated rates for projects and services due to collusion with procurement personnel around the vendor selection or bidding process. A more extreme version of this is when an internal member of the buying team manipulates records to fraudulently pay a partner through a deal set up with a fictional company.

Hartley is an advocate of internal processes and structures that enable an internal culture of responsible and positive monitoring of activity that empowers each employee to be vigilant about fraud. With more eyes on the records and more parties involved in procurement decisions, many fraudulent activities can be thwarted, or never even attempted. Whether we are discussing a public body or a private enterprise it is an approach few can argue with.

Protect yourself

Apart from instituting a programme of questioning and reporting processes and events an employee finds to be suspicious there are a few other steps any public organisation or private company can take to fight procurement fraud. Each of these is built on the key tactic against fraud: Create a positive internal culture towards fraud reporting.

• Look for signs such as changes in spending patterns, schedules, orders or times. These may be explained satisfactorily with a simple question, which can be confirmed by transparent records. Another side to this same coin is monitoring for unusual activity in the bid process itself. Warning signs include a lack of control and competition in the process, especially with low initial bids from vendors followed by excessive revisions in costs.
• A key area to look at is the invoicing process. Be mindful of an unusual number of invoices with round values, and of repeated invoices with non-sequential numbers from any one particular vendor. On the vendor subject, frequent auditing of accounts and relationship building with several team members ensure against phantom vendors draining funds.
• It’s important for everyone in the department, not just procurement personnel, to be aware of these elements. Technology can play a part too. Modern e-procurement solutions can assist the administration in monitoring and trend tracking by enabling all relevant information to be accessible from one place.

By raising awareness of the possibility of procurement fraud, and by putting robust monitoring processes in place, any company or public body will be taking the right steps to minimising risk. With figures like those presented by Kroll and OLAF becoming more widely known both within and outside the procurement industry, the topic is gaining the attention it needs. With proper vigilance, the hope is that the corruption and fraud figures go down. Ironically, what may help that to happen is raising awareness of just how shocking they currently are.

Pedro Paulo is CEO at Gatewit.