Detecting Common Procurement Fraud Tactics

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A company can have measures in place to reduce illegitimate discounts or partial refunds and suspicious supplier or vendor relationships however the chance and the risk of fraudulent activities happening will always be there.

When there is a global financial recession looming, the normal daily routine of a speculative business environment, that is normally characterized by demand, organization and opportunity, is aggravated and the pressure increases on employees to stay on target and meet their monthly goals. That is when the opportunity is created for unethical behaviour, such as committing fraud, as it is seen as “ok” to use any means possible, to make sure of financial survival. Fraudulent opportunities exist in all businesses, and  cunning, unethical individuals have the special talent and nasal chambers of a bloodhound to sniff them out.

Some common procurement fraud tactics include, but are not limited to:

Abuse of Change Orders

A contractor, scheming with a procurement official, after winning a low bidding contract, submits a change order request increasing the price and profit.

Duplicate Invoices

Suppliers or vendors can intentionally submit false, duplicate invoices.  The scheme can involve a contractor acting alone or plotting with an employee of the victim organization who shares in the profits.

Phantom Vendors

In an unsecured environment, a local employee with procurement responsibilities, sets up a non-existent contractor. Normally phantom vendors claim to provide services or consumables, rather than goods or works that can be verified. The company then pays the bogus contractor for products or service which the entity never provided and the money is kept for other purposes, sometimes self-enrichment, other times to pay bribes to officials for a business benefit in return.

Exchanging Products

A supplier can substitute products or materials of inferior quality than specified in the contract, in order to increase profits or comply with contract time schedules. The dishonest supplier might give gifts or favors to inspectors or pay kickbacks, influence as payment for having made the income possible, to contracting officials to facilitate the scheme, and will submit false documentation to conceal it.

Purchases for Personal Use

Employees can purchase items through their company intended for their personal use illegally, for example your child’s school stationery, I have to say I was quite jealous of my fellow classmate’s Mont Blanc Meister fountain pen and I had crayons. I thought he was very sophisticated for a grade 1. Or the employee intends to resell  purchases as part of a side business, such as computer parts or inventory.

Excessive Purchases

Unnecessary, excessive or inappropriate purchases of goods or services, or unnecessary repairs, might indicate corruption or purchases for personal use or resale. On a lighter note, this is not the same as the Woman Banned From Abercrombie & Fitch For Excessive Purchases.

Red flags for fraud tactics include:

  • Poor or non-existent accounting department.
  • Lower quality products have higher prices.
  • Wining and dining of procurement staff by suppliers.
  • Procurement employees extending periods of notice before they allow an audit to take place.
  • Employees spending time at the office 24/7, never taking leave.
  • Special treatment given to certain suppliers.

The risk of fraud cannot be eliminated completely, it can however be greatly reduced if managed appropriately. But if the appropriate methods are not put into place it can have a negative effect on your business revenue and profit. Routine checks for deliveries not received, discrepancies between purchase orders and delivery are a few of the procedures needed to reduce fraud risks. Procurementexpress.com is a money and timesaving solution to manage purchase orders and put you in control of company spend. Employees can load purchase orders and attach invoices from any device. Managers can approve, reject or comment on purchase orders and get an instant view of budgets, even when on the road and the Finance departments get an accurate and paperless expense tracking system.

Book a free demo to find out how ProcurementExpress.com can work for you.

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