Globally, the cost is US$3.7 trillion annually. Your organisation alone is losing anywhere from $10,000 to $150,000 a year. For some departments, that’s a conservative figure. Based on these numbers alone, you’d assume those in managerial positions would be doing everything they can to stop the bleeding but, for several reasons, procurement fraud seems to get a free pass.
- It’s too hard to keep on top of and takes up too many hours
- Random spot-checking is the only line of defence
- Some organisations simply don’t know where to begin (which is fair enough)
To be fair, the procurement function is ripe for the fraudulent picking. It’s a complex process, often without adequate oversight, in which every step provides an opportunity for kick-backs that get lost in the wash. However, there is a way to stop this nefarious activity without using up your employees’ hours and without relying on our human, biased eyes. It’s called advanced analytics.
What is procurement fraud?
Put simply, procurement fraud involves a deliberate deception within the procurement process that results in financial gains for an individual or group of people. In the vast majority of cases, a contract is awarded to a vendor at above-market scale after competitor bids which are far more financially sound get overlooked. The procurement officer responsible for awarding the contract then receives a kickback.
Of course, this isn’t the only step in the procurement function that can be abused. All managers need to be familiar with the tell-take signs of fraud.
The red flags of procurement fraud
- Writing tender specifications that benefit a particular vendor
- Accepting late or suspicious bids
- Frequently extending contracts
- Not declaring connections to supplies (nepotism)
- Giving a particular bidder sensitive information relating to the tender
- Awarding contract to a vendor who bid well above market value
- Frequent lack of proper paperwork
- Repeatedly awarding contracts to the same supplier
- One individual oversees the entire procurement process
- Purchase order splitting to make it appear orders are sitting within financial stipulations
Yes, there’s many ways in which the procurement function can be abused (and that’s not even an exhaustive list). But the good news is that all these red flags means it’s detectable.
What is the cost of procurement fraud?
When people talk about procurement fraud (which isn’t often enough), they focus on the numbers. Yes, it costs businesses lots of money – US$3.7 trillion a year, actually. But the hurt runs deeper than the accounts. It trashes reputations. Think about it from the supplier’s point of view. Would you bother putting a bid in if you knew you had zero chance of winning the contract? Procurement fraud leaves a stench that will keep honest, trustworthy suppliers (aka, those you want to work with) at a distance.
It also wreaks havoc within an organisation. Fraud is an act of betrayal and, once uncovered, damages relationships, sometimes permanently. Even if the perpetrator is removed, distrust can linger. It’s not uncommon for companies to invest heavily in counselling for their employees after fraud has been uncovered.
Advanced analytics is your tireless watchdog
By far, the most common way fraud is uncovered is when an employee reports suspicious activity. The second most common is random spot-checks. Obviously, neither can be relied upon – far too many will slip through the cracks.
The good news is that fraudsters leave a trail; there’s simply no way they can completely hide what they’re doing. Duplicate invoices, invoice splitting and contract over spend – these are the tell-tale signs that something is up. To this end, Purchasing Index has built their ProcureTrak Compliance Suite to pick up on these anomalies. And it doesn’t miss, doesn’t get tired, can’t be coerced or manipulated.
Don’t leave fraud detection to your employees; it’s inefficient and unfair on them. With the right analytics, your organisation need not be a part of the rising cost created by global procurement fraud. Get in touch today.