As fraudsters get better and better at targeting businesses, 4C’s Philip Joss considers the gravity of the issue and looks at what counter measures can be employed to minimise risks.
Procurement fraud is a difficult area for many organisations to tackle. This is not only due to the ever-growing array of threats facing businesses, but also the sheer magnitude of many supply chains. An increasing array of suppliers, coupled with complex networks and logistics make it difficult to detect irregularities. In addition, many businesses provide limited resources to manage these risks.
For these reasons, it should come as no surprise that procurement fraud is rife. This piece examines the extent of the issue and considers what businesses can do to protect themselves.
A colossal cost
According to research from the Centre for Counter Fraud Studies, the cost of fraud to the UK’s private sector is close to £144 billion per year. Of this, an estimated £127 billion is linked to procurement.
The situation is no better in the public sector where instances of procurement fraud went up by close to 500% in the 12 months from April 2015, according to the Chartered Institute of Public Finance and Accountancy’s latest Fraud and Corruption Tracker. Amongst the victims of the reported 353 scams were a number of Councils, as well as emergency and health services.
One of the reasons procurement fraud is so difficult to stamp out is the number of forms it can take. From collusion amongst suppliers bidding for a contract, through to the use of fake invoices for non-existent services or products. Tactics for avoiding detection are also numerous, for example, splitting a large purchase into smaller chunks to avoid scrutiny. However, there are many ways for businesses to guard against it.
The Association of Certified Fraud Examiners believes $2.9 trillion are lost globally to procurement fraud. All companies are vulnerable, including international corporations, operating within highly regulated industries. In this context, the first step to tackling fraud is acknowledging its existence as a serious threat.
Leading businesses consider fraud as part of their risk register and have a defined resource to mitigate it. This resource, be it a person, an internal team, or an external agent, needs to ensure certain principles are adhered to within the organisation.
For example, the need to segregate duties within procurement. This basic rule is often overlooked and should be considered a red flag when it comes to fraud. Increasing the amount of purchase order based transactions that inherently force segregation of duty principles is a technique used in high performing businesses. A high percentage of invoices with purchase order references should be targeted; 98% is achievable with the right approach and governance. Removing access to programmes and solutions when people change roles within an organisation is another rule that is seldom implemented.
Poor control of supplier information and bank account change processes in Accounts Payable can lead to fraudulent payments being made to false bank accounts. The potential fraud takes place when a letter is received in the accounts payable team or general finance team in smaller organisations requesting that the supplier bank account needs to be changed. The unsuspecting company change the bank account in their payment system to the one requested on the fraudulent letter and hence the fraudsters start to receive payments. Mature AP teams have processes in place to capture this type of fraud. Without a robust check on the origin and validity of the change request the AP can incorrectly go ahead and action the fraudulent request which results in at best a lengthy recovery process and at worst complete loss of the transferred money.
In terms of suppliers, the complexity of modern supply chains requires a more thorough auditing process. Businesses need to audit not only their direct suppliers, but also their subcontractors and the agreements they have in place with them. In addition, consistently analysing spend patterns with suppliers is essential to uncovering fraud. Any instance of cost thresholds being ignored, or costs being split into separate payments must be investigated.
A united front
Strong process integration between procurement and accounts payable is another key requisite to fighting fraud. This ensures that goods and services are purchased following the organisation’s policy and that invoices are received before any payments are made.
A close relationship between the functions also means that each has a better understanding of the overall situation. As a result, accounts payable will come to recognise typical purchases and can raise the alarm if an invoice comes through that does not conform to previous requests. Having two teams working together makes for a more holistic process, which is better able to spot discrepancies.
Training staff or bringing in experts to implement and design processes aimed at identifying procurement fraud is invaluable when it comes to mitigating risks. Often an external viewpoint can help uncover instances of fraud, for example, in cases concerning long-standing and trusted suppliers.
A brighter future
Despite soaring figures and some complacency in terms of getting to grips with the extent of procurement fraud, there are signs of progress. Many businesses have implemented improved tracking and analytics programmes, which enable them to better pinpoint supply chain fraud.
There is also a greater awareness of the risks of procurement fraud due to events such as the horsemeat scandal. Businesses have witnessed the long-standing consequences of such scenarios and more and more are looking to instil a culture in which employees are encouraged to flag dubious practices.
Investing in better systems, improving documentation and working more closely with suppliers can seem costly, but is well worth the investment. Not only because instances of fraud will drop, but also for the other cost benefits these tactics foster. When it comes to fraud, the cost of complacency is colossal and the sooner companies take action the sooner they will reap the rewards.