“Corruption is authority plus monopoly minus transparency.”
Previously, we took a look at the different ways that procurement frauds can take place in the bidding process. But do such frauds only happen in the contest of winning contracts? If anything, securing a contract merely serves as a stepping stone for suppliers towards more inconspicuous fraud tactics that can be used upon qualifying as an official vendor for a company.
Unfortunately, these vendors are almost always assisted with some ‘help from the inside’. That being said, certain types of frauds can also be committed by employees themselves as well. Here, we explore the types of procurement frauds that can take place in the operational side of things, and how they can continue happening if their signs are left unattended.
1. Vested Interest
Mention the words ‘procurement fraud’, and the first thing that comes to the minds of most procurement professionals are bribes and kickbacks. This is a result of the relationship that procurement personnel may have with a supplier or contractor, sometimes familial as well.
These ‘friends with benefits’ usually reward each other through the means of kickbacks and bribes, also referred to as corrupt payments. However, payments here do not necessarily refer to cash, but rather things of value that can influence the recipient.
This includes expensive gifts, use of unsolicited credit cards, and even sexual favors. As much as such an arrangement benefits the procurement executive, it is just as capable of directly destroying a company’s reputation if low-grade materials are purchased by a corrupt procurement executive with interests in gaining commission.
Noticeable Red Herrings:
A procurement executive’s discernable favoritism towards a particular vendor
A close association between a procurement executive and a vendor
Approval on purchases that are overpriced, in excess or of low-quality goods
A procurement executive constantly receives gifts from vendor(s)
2. Fictitious Vendors/Fake Companies
Companies with a weak procurement workflow in place are usually victims of this astute modus operandi. What better gateway can an executive have if his responsibility encompasses the entire purchasing process right down to issuing payments? Yet, be mindful that this could also be the works of a few employees with different administrative responsibilities who have conspired together to set up these fraudulent companies in place.
The payments to these phantom companies’ usually go unnoticed as they are kept below thresholds that require higher-level transaction approvals from procurement superiors.
Noticeable Red Herrings:
Vendor(s) cannot be found in phone or business directories.
Vendor’s registered address turns out to be a mailing address.
Invoiced goods or services unable to be verified.
3. False Invoicing
A contractor could submit an invoice for services that were never provided, multiple invoices for services or expenses that were only incurred once, or an inflated invoice that well exceeds the cost of goods or services provided.
This type of fraud usually pulls through with the assistance of a procurement executive to ensure that the requested payment is approved.
Noticeable Red Herrings:
Invoiced goods or services are unable to be accounted for.
Multiple invoices found with similar description of goods and services, amounts, invoice numbers, or purchase order numbers.
Prices on the invoice do not match the purchase order.
4. Imprest Fund Abuse
With the lack of proper administration, this fund can be misused by contractors in a variety of ways. The supplier could submit false or inflated invoices (as described above) for reimbursement of expenses or even make claims for personal or unsanctioned expenditures from the fund.
Some suppliers even go as far as submitting reimbursement requests both to the imprest fund and accounts payable. With a weak internal system in place, these requests often go overlooked and are approved without the need for the question as the discrepancies remain undetected.
Noticeable Red Herrings:
- The nature of the reimbursement claim(s) made do not appear to be legitimate.
- Disbursal of equal or similar amounts to the same vendor from both the imprest fund and accounts payable.
- Lack of proper governance on disbursements and reimbursements.
5. Unwarranted Purchases
Gratuitous purchases are usually done by procurement executives with the intention of personal use or resale. Without a proper inventory tracking system in place, an employee would be able to make purchases with company money to make private purchases or buying items at cheaper prices only to resell them to other companies with a better margin.
Noticeable Red Herrings:
- Unusual or unexplained high volume purchases of products or services from a particular supplier
- Abnormally high purchase volumes from a specific supplier
- The selling of used items (surplus sales) followed by reorders.
- Repairs or replacements within short time frames.
- Insufficient justifications for product purchases.
Make It Stop!
This vicious expedient of procurement fraud is overarching throughout the various sectors and processes pertinent to a company’s procurement operations. What’s worse is that almost all of these wrongdoings are done with the involvement of executives within the victim organization itself.
But if there’s one thing that can be extracted from these types of frauds is that they can be gotten rid of with infallible procurement practices and systems in place. We’ve deduced how effective measures that prevent procurement fraud also act as crucial determinants that contribute to the makings of a foolproof procurement system for your company.