Avoid Fraudulent Purchases

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Challenge

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Procurement is purchasing goods and services for an organization, and most business expenditures flow through departments. The procurement department is responsible for negotiating contracts and procuring the goods and services required by the business. The sourcing and procurement process is particularly prone to fraud and difficult to detect, especially in large organizations with complex procurement operations.

The goal of a good procurement strategy is to source the best possible goods and services at the lowest possible price while reducing risk, building strong relationships with trusted supplier partners as well as taking advantage of cost-saving opportunities and ensuring a smooth payment process. Procurement fraud can take many forms, from embezzlement to overpriced items. Below are some of the most common types of fraud whereby employees defraud an organization of funds.

1. Rebate

One of the most common frauds is rebates or rewards. Suppliers pay rebates to the buyer who purchases goods and services. The rewards may be cash payments, benefits, influence or other forms of bribes.

To earn rebates, purchasing managers may approve substandard suppliers, procure unnecessary goods or services, or disrupt the tender process by excluding preferred suppliers. Another common strategy is to write project specifications in such a way that only one bidder can qualify.

Bribery-based transactions are rarely beneficial to the purchasing organization. Suppliers may overcharge or provide inferior products to recoup bribes. Even if the product is acceptable and reasonably priced, the purchasing organization will lose the competitive advantage.

2. Conflicts of Interest

Another common fraud involves undisclosed relationships with bidding companies. For example, the person who ultimately approves the bidding process may own stock in the winning company or have some relationship with the company or its shareholders. Since the employee profits indirectly from the transaction, his interest is in making the best deal for the supplier, which often means a bad deal for the organization that pays him.

Because procurement is a complex operation involving large sums of money and multiple contractors, it is highly susceptible to fraudulent schemes.

3. Fake company/order

One of the most shocking and easily detected procurement fraud schemes is the simple manipulation of the system by submitting orders to shell companies and invoicing products that are never received. This type of fraudulent scheme seems unlikely to work, but it is easy to implement in an organization with fragmented procurement and disorganized processes, especially if there is no procurement software available to verify orders from purchase order to delivery, invoice and payment.

In order to process false or fraudulent orders under the company’s watch, employees may place a series of small orders that do not require formal bidding or approval. Certain types of purchases or exceeding set amounts may trigger contract approval thresholds. By making fake orders small enough for expected items to bypass the approval requirement process, employees can successfully commit fraud, at least for a while.

4. Fraudulent Invoices

Procurement fraud does not always happen internally. Suppliers may invoice undelivered inventory items, submit duplicate invoices, or charge fees in excess of the negotiated contract amount, or substitute lower-quality materials, or charge for work that was never performed.

5. Bid rigging

A group of suppliers has been known to conspire to inflate prices during the bidding process. Bid rigging is a situation where a group of suppliers submits high prices to benefit a particular bidder. Typically, in this case, the winning bidder and the losing competitors profit from inflating the contract price.

Solution

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The main weapon in any fraud prevention toolbox is procurement software. Distinguishing patterns and trends might be difficult for humans. However, 8Manage SRM, you will be more likely to detect suspicious behavior.

Use 8Manage SRM system, which can greatly increase the chances of detecting a corrupt scheme.Leverage 8Manage SRM to clearly define and enforce tender terms and acceptance requirements.Ensure supplier due diligence is performed during the supplier approval process. Suppliers shall be thoroughly reviewed and verified by at least two persons and kept in the 8Manage SRM to identify over-consumption or maverick spending.

Procurement fraud can and does happen to the world’s largest companies. The key to prevention lies in understanding data, changes in market pricing and purchasing patterns. 8Manage SRM makes all functions easier.