In the US, that figure stands at $42bn annually, while globally it soars to an estimated $2.9 trillion.
Nearly 30% of organizations suffer from procurement fraud at some time, according to research on economic crime from PwC. Though private sector companies traditionally are the target, in the public sector this type of fraud has more than doubled since 2012.
‘Big Five’ Economic Crimes
Procurement fraud is now so widespread that it has become one of the ‘big five’ economic crimes, along with asset misappropriation, bribery and corruption, and accounting fraud.
Procurement fraud can be committed by anyone involved in the purchasing process, on both the buy and supply side. From those strapped for cash or just plain greedy, through to others for whom it’s the result of an error of judgment, or being coerced or manipulated into colluding with someone else.
False invoicing, collusion, bribes and kickbacks, false representation, bid rigging and setting up accounts in the names of fictitious suppliers are all common modus operandi.
And while procurement fraud can (and does) occur throughout the entire purchasing life cycle, payment processing, vendor selection and invitation to quote/bid are the points at which it is most prevalent.
How to Spot Procurement Fraud
If you want to identify procurement fraud as early as possible, there are five common ‘red flags’ to look out for.
Apathetic purchasing. If a decision maker seems unconcerned about the quality of the goods or services being procured, they may be choosing a sub-standard supplier in return for a kickback.
Failure to question prices. If the supplier is never asked to justify price hikes, something suspicious may be happening. Of course, costs do rise, but if increases always ‘go through on the nod’ there could be collusion or the fraudulent inflation of prices.
Immovable suppliers. Long-term relationships can be of benefit, but if one supplier is habitually chosen ahead of others, particularly if they obviously aren’t best qualified, their extended tenure could be down to nepotism or dubious procurement practices.
Protected channels of communication. When only one person is authorized to talk with a supplier, it may be an attempt to control information that might potentially uncover an ongoing fraud. It’s something worthy of further investigation.
Employee concerns. One of the biggest danger signals is when colleagues voice suspicions about those they work with. Their day-to-day interaction with possible fraudsters and corrupt suppliers means they are likely to ‘smell a rat’ before management, who are at arm’s length.
How to Prevent Procurement Fraud
If you don’t take steps to combat fraud, then according to the Association of Certified Fraud Examiners, the cost to you of procurement fraud is likely to be double what it need be. So what should you do to prevent it?
One. Conduct a proper risk assessment, something that global professionals services firm, PwC, says one-fifth of companies don’t bother to do. The Institute of Internal Auditors’ fraud risk assessment tool can help you measure your level of possible risk. blur Group’s procurement waste calculator can also help you estimate your potential annual loss to procurement fraud.
Two. Vet potential vendors thoroughly. Not only is this a way to protect your business from possible procurement fraud, but it can also make for a more effective relationship with your suppliers.
Three. Establish an extensive compliance process that makes it more difficult for someone to cover up their fraudulent activity. If the threat of being caught increases, potential fraudsters will be less inclined to take the chance.
Four. Introduce spend analytics into the business. If you aren’t analyzing your spending, you won’t be able to tell legitimate purchases from the fraudulent or wasteful.
Five. Introduce awareness training so that employees learn to identify potential weaknesses in procedure that allow fraud to happen. This can be done through in-house training, or online videos that are available as and when needed. Fraudweek.com has a package of resources for implementing fraud awareness training programs.
Six. Set up a whistleblower hotline. Properly done, this will allow employees to confidentially report suspicious activity without putting them in a compromising position.
Seven. Use a managed services platform like blur to find high quality vendors. With over 65,000 pre-vetted suppliers in 145 countries registered, you can be sure that any shortlisted suppliers are being selected on merit, and nothing else, while our Statement of Work ensures projects are meticulously completed to brief and to budget – with no exceptions.
Contact a Procurement Solutions Consultant today to learn more about how blur’s Indirect Spend Management platform can enable your organization to start preventing procurement fraud.