Six Procurement Fraud & Symptoms to Alert you to Action

What is Procurement Fraud?

Procurement fraud is like common cold but with far unpleasant implications. In a typical arrangement, it is the procurement manager or other designated officials who award contracts to a vendor in return of favors. As a result of this unethical transaction, businesses suffer billions of dollars in loss. The Association of Certified Fraud Examiners (ACFE) estimates that each year, companies lose up to 5 percent of revenue to fraud that amounts to $3.7 trillion globally.

Ways to Identify Procurement Fraud

If you ask for the solution to procurement fraud, we are afraid that there isn’t any better way to control it than enforcing reliable vigilance. Under the purview of this vigilance, are some preventive measures that can be considered a solution to procurement fraud. Below we have compiled six commonly surfacing procurement frauds and symptoms that should alert you to action.

Scenario 1.

To begin with, let’s talk about the most common of all practices-bribery. Bribery is an incentive given by the contractor of a winning project to the influencer within a function. This monetary amount ranges from 5% to 20% of the total contract value won by a vendor. In some cases, this bribe need not be a raw fiscal deal but in kind as well including but not limited to expensive gifts and gestures of any nature.

• Signing up for product/service that doesn’t match value output for the price paid
• Signing a supplier with no previous contract with your organization
• Member of your procurement function enjoys monetary perks or other privileges missing in their earlier lifestyle

Scenario 2.

There could be many false bills pending clearance which are mostly duplicate or inflated invoices submitted by the supplier. These fake bills cost a company financial drainage and directly indicate some ongoing malpractices.

• Improper accounting for invoiced goods/services
• Multiple invoices sharing same purchase order numbers or identical items
• Early payment approval by the designated authority that mocks the company’s existing payment policy

Scenario 3.

You’ll see that some suppliers are paid over the standard market rates. Suppliers deliver goods/services beyond the requirement. Suppliers are also not qualified on existing on-boarding parameters. It is challenging to bust this malpractice owing to the customization of determinants in favor of the bidder.

• Accepting below-standard quality of goods/services
• Paying above market standard without/improper negotiation
• Awarding contracts that do not justify goods/services

Scenario 4

In the event of bid information leakage, late acceptance of biddings, or re-bidding of a closed tender, it’s screaming corruption. You’ll know that there is an accomplice within the procurement function who facilitates bid-rigging, advises on complementary bidding at lower quotations and on a cyclical basis to influence the winning of the bidder.

• Allowing bidding beyond the deadline
• The last bidder is the lowest bidder
• Rejection of eligible bidders on unclear grounds

Scenario 5

An employee gives no proper justification for the need. They influence a member of the procurement team to procure goods/services in exchange for gifts in cash or kind. Any service/good that doesn’t contribute to the company’s interest results in a conflict of interest and therefore seen as fraudulent.

• Exchange of favors between bidder and buyer
• Unprofessional proximity between employee and buyer
• Acquisition of services/goods not helpful for the company

Scenario 6

In procurement fraud, there are several layers of fraudulence. While one is to compromise the quality of goods/services, the second is too fully conceal the quality aspect in the bids submitted. Delivery of sub-par goods/services, then, affects the end product. An unethical supplier has several hacks to exploit the goodwill of a buyer and may end up breaching contracts unaware of the buyer.

• Duplicate payments made in cash as well as AP transfer
• Undue advance payment requests
• The threat to forfeit supply against contract termination clauses

Hence, in Conclusion, we would like to emphasize the need for extreme vigilance of your procurement team and employees in general. Irrespective of designation or authority, a standard protocol must be followed. One great way to enforce standardization is to upgrade or integrate your existing ERP with a robust Procure-to-Pay technology with secure bidding system.