By Stephen Ashcroft, February, 2014. Procurmentleaders.com
In this guest post, Procurement Leaders invites risk specialist Stephen Ashcroft to look at the state of procurement fraud and where he thinks functions could be managing it better.
There is an excellent report, the Report to the Nations on occupational fraud and abuse, published in 2012 by the Association of Certified Fraud Examiners. It is directly relevant to procurement specialists and those charged with auditing procurement activities; particularly relevant to procurement is the corruption scheme category in which an employee misuses his or her influence in a business transaction in a way that violates his or her duty to the employer in order to gain a direct or indirect benefit (e.g., schemes involving bribery or conflicts of interest).
The report identifies 16 behavioural red flags of perpetrators. These are, by ranking:
- Living beyond means – 35.6%
- Financial difficulties – 27.1%
- Unusually close association with vendor/customer – 19.2%
- Control issues, unwillingness to share duties – 18.2%
- Divorce/Family problems – 14.8%
- Wheeler-Dealer Attitude – 14.8%
- Irritability, suspiciousness or defensiveness – 12.6%
- Addiction problems – 8.4%
- Past employment-related problems – 8.1%
- Complained about inadequate pay – 7.9%
- Refusal to take vacations – 6.5%
- Excessive pressure from within organisation – 6.5%
- Past legal problems – 5.3%
- Complained about lack of authority – 4.8%
- Excessive family/peer pressure for success – 4.7%
- Instability in life circumstances – 4.1%
Procurement is a ripe area for an opportunity to engage in occupational fraud. Brian Farrington Limited has produced a range of indicators that may indicate fraud. These include:
- Reluctance to change suppliers
- Refusal to issue invitations to tender
- Single source decisions
- Insistence on sole contact with suppliers
- Price increases being granted without justification
- Change orders issued that do not comply with procedures
- Insistence on approving selected invoices
- Regular hospitality at sporting and social events
- Acceptance of low quality goods and services
- Disclosure of budgets to selected supplier(s)
- Verbal purchase orders, confirmed upon receipt of an invoice
The head of procurement would be advised to explore fraud risks with these 7 ’starter’ questions:
- What are the arrangements for whistleblowing in your organisation?
- When did internal audit last conduct a detailed review of procurement practices?
- Are the buyers rotated across commodity categories?
- Is there a register to record acceptance of moderate hospitality?
- Are there financial sign-off limits for the award of contracts?
- Which supplier(s) are long-term entrenched in our business?
- How do we evaluate genuine tenders?
What else would you add?