Procurement Fraud: Why It Happens-- Still

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Purchasing Fraud Prevention

Despite the ongoing emphasis on, and resources dedicated to, internal control,
procurement fraud continues to dog companies in all industries. Main reasons:

Absence of adequate purchasing policy. Many companies still lack policies for
screening of approved vendors, review and approval of invoices, purchase orders,
etc. Not only should the company have detailed procedures governing all
procurement activities, it should require all procurement staff to read and certify
that they have understood and will comply with the policy.

Inadequate policing of conflicts of interest. Though most corporate policies prohibit

employees from engaging in business activities that present a conflict of interest,
procurement employees can and docircumvent the rules by awarding contracts
to vendors where family members or friends work.

Essential: Enforce a policy requiring all procurement employees to disclose any

personal connections to any vendors with which the company does businessor may
do business with.

Lack of segregation of duties. Still one of the most fundamental fraud deterrence
requirements for all business processes, too many organizationsespecially
smaller onescontinue to allow purchasing staff to approve invoices, process
payments, etc.

Failure to encourage whistleblowers to come forward. Though public company

employees are fully protected by Sarbanes-Oxley against retaliation when they
blow the whistle, management still often fails to reassure their people that they
are safe and secure when they decide to come forward with information about a
procurement fraud.

Important: Because many procurement frauds involve collusion between an

employee and an outside vendor, with kickbacks or bribes serving as the driving force,
there is usually a good chance that someone in either or both companies will know
about the fraudulent scheme. They should be repeatedly encouraged to blow the
whistle.
Poor controls of decentralized operations. When companies with multiple locations
conduct procurement locally, the opportunities for fraud are far greater than if
purchasing is centralized.
Reason: Employees in local units may assumeoften correctlythat there is less
management review of purchasing activities at far-flung business units.

Failure to obtain competitive quotes. Though it is basic procurement policy to

request a minimum of three quotes on purchasing for amounts above a given
threshold, loose control of this rule can easily result in procurement staff
neglecting to put contracts out for RFPswriting RFPs in such a way that only a
single, preferred vendor is able to fulfill the order extending RFP deadlines to give
preferred vendors an opportunity to receive privileged information about
competitors bids, etc.

Vague specifications on RFPs. This can enable a collusive winning bidder to later
claim the contract awarded was not in line with specs and demand additional
payment.

White-Collar Crime Fighter source: Andrew Durant, CFE, FCA, Managing Director in the
London Disputes Investigations Practice of Navigant Consulting (Europe) Ltd. Andrew has
extensive experience with corporate fraud investigations. He can be reached
atadurant@navigantconsulting.com.

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