US companies ignoring 'red flags' of fraud

9 August 2009

10 August 2009 | Jake Kanter

Businesses in the US are not fully aware of their exposure to procurement fraud, research by consultancy PricewaterhouseCoopers has found.

The report, Cracking down: the facts about risks in the procurement cycle, said organisations are more vulnerable to corruption in the recession than senior managers realise.

According to PwC, the economic downturn has delayed upgrades to IT systems, and "strained" procurement systems - under pressure to reduce costs - have increased the risk of fraud.

Buyers who "operate under the radar" and have a "significant operational knowledge of systems and processes" are usually involved in corruption, it added.

Red flags to watch out for include inconsistent procurement data, lack of controls around the use of preferred suppliers and low compliance with buying guidelines.

PwC urged organisations to put in place tougher controls to mitigate the risk of procurement fraud. Measures could include consolidating vendors and strengthening supplier management IT systems. It added that analysing buying trends could expose wasteful or collusive behaviour.

Dalit Stern, advisory partner at PwC, said: "The consequences of not establishing safeguards are dire and can include financial losses, public mistrust, criminal penalties and, for government contractors, potential disbarment. These consequences are avoidable with appropriate, proportionate, risk-based procedures."

The US Department of Justice's National Procurement Fraud Task Force (NPFTF) has pursued more than 400 cases of corruption since its inception in 2006, 27 per cent of which have involved bribery. The NPFTF has also helped secure 300 criminal convictions and "hundreds of millions of dollars" in settlements.

The report also highlights recent developments in the area of procurement, including that in addition to the Federal Government, state and local governments have stepped up enforcement efforts. More than 20 states and cities including New York and Chicago have followed the federal government's lead by enacting their own civil false claims acts.

SMaug2009

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