Can you fight procurement fraud with the right software systems in place?

Unfortunately, fraud and corruption are still rife in both public and private organisations globally.

The last few months of 2019 have seen some shocking examples of procurement-related fraud and corruption.

In the UK, a recent Supply Management article by CIPS reports that: “£266m lost to NHS procurement fraud.”

While in the US, The Daily Texan reported: “The University’s former assistant vice president of procurement, business and payment services is connected to a criminal investigation by the UT Police Department for conduct that occurred during his job, according to records obtained by the Austin American-Statesman.”

Closer to home in Perth, Western Australia, ABC News reported: “The assistant director general of WA’s Department of Communities has been charged with allegedly stealing more than 2.5 million of public money in what could prove to be one of Australia’s most serious cases of public sector corruption.”

As well as in Melbourne, Victoria, ABC News reported: “It’s been an explosive week at the Independent Broad-based Anti-corruption Commission’s (IBAC) hearings into allegations of corruption at the City of Casey. The public hearings have blown open allegations of a high-flying developer attempting to pay off not just councillors, but state political candidates, a community group and Aboriginal leaders.”

What is Procurement Fraud?

If procurement is defined as the purchasing of goods and services which offer the best value for money, fulfill required function/s in a specified time, at the agreed quality levels, then procurement fraud would be the corruption of these values for personal gain through dishonest and criminal means.

It can take different forms, but here are a few examples:

• Kickbacks and bribery
• Embezzlement and the diverting of payments
• Dubious vendor relationships
• Conflict of interest
• Insider information
• Conspiring with staff to inflate prices
• Phantom/shell supplier companies and orders
• Billing fraud – fraudalent invoicing, duplicate invoicing, invoicing for work not done and goods not delivered, etc.
• Delivery fraud – intentional sub-quality goods or services delivered
• Bid rigging and high-price collusion among bidders
• Split purchases – when a large entity can be split into smaller ones and thus fall below the approval threshold to avoid scrutiny
• Writing the tender requirements in such a way, that only one bidder can qualify

The consequences: why we should care

• Substandard good or services could be a safety risk
• Financial implications
• Reputation implications
• Ethical and environmental implications

On a serious note, the end results of rampant corruption, especially in government and state-owned enterprises, is near catastrophic. According to an article published by IACCM ‘Combating Procurement Fraud’ by Colin Cram. “Corruption kills people. It destroys jobs, economies and motivation. It can reduce investment from other countries and set-back economic hopes. Infrastructure can fail. Living standards and life expectancy can be badly reduced.”

How to catch procurement fraud using software

Procurement is one of the foundations of any business and large amounts of a company’s money flow through this department – all the goods and services needed to make the work happen – and vulnerable areas exist internally, externally and all along the supply chain.

ACFE published a report: Report to the Nations 2018 Global Study on Occupational Fraud and Abuse, which found that:

– Internal control weaknesses were responsible for nearly half of frauds

– Data monitoring/analysis results in 52% lower losses and 58% faster detection

Most crimes are committed by people when they think they won’t get caught. They see an opportunity and take the gap. A good procurement solution can help root out the culprits, or at least raise a red flag of caution. Here are a few ways a PMS can help:

1. Data analytics

Fraud could creep in anywhere along the supply chain and sometimes it’s a complex web to navigate, especially with the increase in the number of suppliers across international borders. It requires vigilant, consistent monitoring to conduct proper checks and obtain the full picture. A manual system would never be able to ‘keep an eye’ on such an intricate chain.

Advanced data analysis is effective in sifting out fraudulent activities and makes it harder for the perpertrator to hide. It searches for trends and uses spend analysis to check for unusual and unexplained spending.

Data analytics helps to raise red flags on suspicious behaviour and reveals patterns and anomalies.

According to a report published by Deloitte: Preventing procurement fraud and corruption, the authors’ concluded that data analysis could unveil red flags such as:

• “After-hours” transactions
• Suspicious relational links, e.g. same addresses or bank accounts
• Short-term changes to employee or supplier accounts
• Inappropriate authority to transact deals
• Conflicts of interest
• EFT transactions conducted without the appropriate approval
• Unnecessary brokers, middlemen or suspicious gifts

2. Coded-in compliance

All business rules, codes of conduct and compliance requirements can be enforced by an automated process. Human nature is weak, so we need to make it hard to succumb to temptation. Not all non-compliance cases are outright, intentional fraud. Sometimes, there are mistakes and misunderstandings of the requirements. If the compliance and governance rules are coded into the software procedures, it will keep users within the legal boundaries.

3. Digital workflow – mapping a clear, automated path for procedures to follow

Since procurement and purchasing is a multifaceted area with many players at many levels along the chain, it can be easy to hide fraudulent activities. Fraud can be prevented by the software being coded to manage workflows, digital sign-offs, multiple authorisation, etc. It doesn’t need to be expensive, just solid in its ability to digitise procedures. If all procurement activities are tracked, there should be a clear audit trail. The system should:

• Have checks and balances with multiple authorisation sign-offs
• Monitor the procurement life-cycle
• Check for things like duplicate deliveries, non-delivery, etc.
• Provide process visibility
• Provide process control, e.g. stock checking
• Provide a thorough document trail. One of the red flags to look out for mentioned in the Deloitte report, Preventing procurement fraud and corruption: “Poor or non-existent record-keeping.”

4. Cross-departmental system integration

If each department acts in its own silo with its own system, there is room for shady behaviour. On the contrary, integration helps to close the loopholes, for example, integration of the auditing and financial software with the procurement software helps to check for inconsistencies, e.g. supplier invoices matching payments and deliveries, etc.

5. Strict vendor/supplier management and screening

• Rigorous due diligence done on vendors/suppliers. (Check financial stability, reputation, track record, conflicts of interest, ethical culture, etc.)
• There should be a central vendor database to avoid duplicates.
• Only vendors on the approved list can be used.
• Check how much of the work is going to be sub-contracted and to whom.

6. Digital tenders

Bidding fraud is common and often hard to pick up. By using a digital system, the process is more effectively managed and the opportunities for corruption are reduced.

Prevention is Better than Cure

Deloitte, Preventing procurement fraud and corruption: “Prevention is always better than cure. The amounts paid to settle any claims resulting from exposed fraud will always be secondary to the loss of reputation and integrity that companies may suffer for being associated with such claims.”

Given how much more effective technology is in sniffing out fraud and corruption, the uptake needs to be greater. It is surprising how many firms are still using spreadsheets and old databases, especially when there are affordable options available.

As business processes develop, so too should the systems that control them.”

By Jeannie De Vynck