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Five Key Indicators of Procurement Fraud CPOs and Purchasing Heads Should Heed

David Gadsden | January 05, 2017 |

As your enterprise grows, so too will its sourcing and purchasing operations, providing a slew of often-irresistible opportunities for hard-up employees and suppliers to gain financially through fraudulent malpractice – all at your organisation’s expense.

Procurement fraud is one of the ways in-house procurement professionals and/or corrupt suppliers can achieve these financial gains, through common fraud schemes like false invoicing, bid rigging, and conflicts of interest.

We have no evidence to suggest that an individual in your procurement department or in your supplier’s sales team have committed procurement fraud, for example, or that they plan to in the future. Research-based evidence provided by PwC, however, suggests that almost 30% of organisations were victims of procurement fraud in 2014.

How to control and combat procurement fraud

For the long-term success of your business, it’s imperative you protect yourself from those who may want to take advantage of your hard work and management efforts, now or in the future.

By examining procurement fraud research from sources like KPMG and PwC, we’ve identified some common red flags that you can watch out for in your organisation:

1) Apathy towards poor quality goods or services

If you find the decision maker for a particular department is relatively unconcerned with the quality of the goods or services being procured, you should look for further signs that they might be benefitting from the arrangement with the low-quality supplier.

If your employee is generally uncompromising regarding the standards of other suppliers, but lax on one in particular, this could be a warning sign that there’s something more valuable to them than company performance.

2) Uncontested price increases

The market changes regularly, but any upward change in prices by your suppliers should be reviewed internally, and in most cases, retendered. For any potential price increase, your team should be able to share how and why the change has come about, based on comprehensive justifications from your supplier for the increase.

If the explanation isn’t reasonable, it’s time to look deeper into your supplier and team. Uncontested price increases could indicate collusion between your supplier and an in-house procurement professional or, collusion aside, a supplier fraudulently inflating prices.

3) Unwillingness to replace a supplier

If your procurement lead is unwilling to replace a specific service provider or vendor, despite regularly documented quality control failures, it’s probably a good idea to look closer at their relationship. Golfing buddies, family friends, and nepotism can be a slippery slope towards procurement fraud.

4) Sole supplier communication

If nobody else in your organisation is authorised to discuss anything with a supplier, except a particular procurement specialist, this could be a red flag for potential fraud. By limiting communication channels, a fraudster can eliminate potentially-damaging information from reaching members of your team who could put an end to it.

Maintaining two-way communications with your suppliers, at multiple levels, is a smart way to avoid procurement fraud.

5) Employee feedback

Nothing should trigger you faster about the possibility of fraudulent activity than information from the people working within your team. These are the people that know each other well, and the people who should know your suppliers better than anyone else within your organisation.

Should one of your people come to you with information about questionable activity – by a supplier, employee or both – you should take immediate steps to investigate the matter without compromising the role your informant played.

If you identify the whistleblower, you run this risk of losing the trust of your entire team – and possibly other teams within your organisation – who probably won’t feel comfortable sharing sensitive information with you in the future.

Protection

To ensure your enterprise is protected against fraudulent activities, the U.S. General Services Administration Office of Inspector General created a Procurement Fraud Handbook that includes useful information on the steps required to complete a fraud audit, as well as some of the areas of fraud risk. Once you have discovered fraudulent activities, the handbook offers official remedies, including criminal charges or civil solutions.

The current global loss to procurement fraud could be as high as $2.9 trillion.Association of Certified Fraud Examiners (ACFE)

Opportunity and rationalisation are two of the more common reasons people use to justify their fraudulent activities. Mitigating opportunity can solve both challenges, as without opportunity, there’s no need for rationalisation.

Prevention

An accelerated procurement & managed services platform like Maistro, are ideally placed to help you avoid the red flags we’ve listed above:

1) Quality. With a cloud software and managed services platform, suppliers undergo an extensive vetting process to ensure they consistently deliver the best quality, so your organisation need not worry about poor standards for your next project.

2) Fixed price and terms. Essential elements, such as a defined Statement of Work and clear Terms & Conditions ensure a fixed price for your project, and prevent any unforeseen costs.

3) Objectivity. Cloud procurement platforms provide thousands of vetted suppliers to choose from. The Maistro Platform, for example, has over 65,000 pre-vetted Service Providers from over 145 countries. Suppliers are shortlisted and selected on merit, eliminating the possibility of subjectivity negatively impacting the supplier selection process.

4) Communication and collaboration. Communication with your selected provider is easy to access, as well as open and transparent. At Maistro, we use Project Space, a cloud-based tool you can access from anywhere and from any device. Using Project Space, you can communicate and collaborate with your provider, as well as gain complete end-to-end visibility of the project delivery process.

5) Feedback. Feedback is essential to the process, and your representative should keep you informed about your provider’s progress, as well as the status of your project.

Contact us today to stride towards procurement practices and processes you can trust.

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