How to spot procurement fraud

25 March 2013
We are now well into 2013 and there has already been a number of allegations of procurement fraud around the world. If you were to look at the majority of global corruption cases, there is often a link to the procurement process through bid rigging or manipulation of contract awards. Procurement fraud is truly a global problem affecting multiple market sectors. Is it on the increase? Or are organisations and law enforcement now more proactive in preventing and prosecuting it? No one really knows. The first and most important step to tackling procurement fraud is identifying the risk in the first place. To look at risk identification in a bit more detail, let’s look at the definition of procurement. The reason a central definition is so important is because it identifies the different areas of the procurement cycle that may be exposed to the risk of collusion or manipulation. The first part of the risk identification of procurement fraud is ‘identification of needs’. Is there a requirement for this product or service in the first place? Has the need being created? Has this been signed off by an independent person or board? Are any savings promised likely to be delivered, and are they transparent and auditable? Recently I dealt with an enquiry where a fictitious requirement was created within an organisation to look at operational efficiencies, and they engaged external (internally recommended) consultants to complete a report. Fraud risks weren’t considered, as the work was too low value and seemed fairly straightforward. But the completed survey provided recommendations and allegedly showed further work was needed. As a result, further work was carried out and the losses were immense. On investigation, the initial report had been lost and no one understood why the work was needed. It was eventually established the work wasn’t required in the first place. Specification is another area where the fraud can be engineered. Has the specification been agreed and signed off? Is it understood by the participants of the organisation or is this understanding only held by one individual? Is the specification narrow to favour a particular individual or company? Or is it broad to allow future contract variations or ad hoc works? Here is another real-life example of case that led to significant losses. Mr X was engaged by company Y as a self-employed contractor to deliver in-house capacity, building an asset register for a multi-million pound project. He was employed because of his expertise (and as a result of an internal staff recommendation) and he became known as the in-house expert at company Y. As soon as the specification of the project was discussed, Mr X immediately stated he knew supplier Z was a global leader in the field and company Y should use them. Company Y followed the correct process and the works were tendered transparently (or so they thought). Mr X was on the tender evaluation board and supplier Z won the contract. But it was not known to company Y that Mr X owned supplier Z and the entire tender process was flawed. The facts around this were eventually uncovered, but company Y had to continue employing Mr X as they had allowed him to hold all the company project data externally while the asset register was being built. It took in excess of a year to resolve these issues at significant cost. Many organisations have no doubt encountered signs of procurement fraud or potential fraud markers. The question is, once they have identified any issues, what are they doing about it? Often, insignificant occurrences are dismissed as irrelevant, but this may be the first path into an investigation. Carrying out basic checks and identifying the signs of potential procurement fraud can save your organisation’s time, money and protect its reputation. ☛ Paul Guile is CIPS global procurement fraud advisor. CIPS is holding a Procurement Fraud MasterClass on 11 June in Newcastle. For full details please click here.
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