Many organizations have been victims of procurement fraud and it is the second most frequently reported economic crime. Allegations of fraud not only have a detrimental effect on the morale of the organizations but also cast their shadow on the quality of products and services, and have health, safety, and environmental implications. And then there is the damage to reputation.
In order to minimize vulnerability to procurement fraud, the first step is to review the organizational procurement processes. The following could expose an organization to fraud:
- Lack of clarity on ownership of anti-fraud processes: Without clear ownership there is confusion about who is directly responsible and accountable for anti-fraud measures. This in turn causes lack of awareness of processes leading to inconsistencies that leave the organization vulnerable to irregularities.
- Over-reliance on interim staff: Over-dependence on interim staff with no long-term connection to the organization may significantly increase risk of fraud. Due to their short-term relationship, these employees have limited loyalty and may lack the incentive to report corrupt practices.
- Low awareness of corporate policy commitments: In addition to requiring employees to sign a corporate code of conduct, their understanding of the processes should be thoroughly and periodically assessed through structured tests. The will ensure that all employees are aware of what constitutes fraud, bribery, and other irregularities.
- Legacy processes and lack of procurement training: Often, long-tenure employees in procurement have no relevant background or training and learn on the job. As a result they might engage in practices that leave them personally vulnerable to allegations of impropriety. This could include irregularities such as sharing prices from request for quotation (RFQ) responses with others for an ongoing competitive process.
- Lack of segregation of duties: Segregation of duties significantly reduces the chances of fraud. For instance, tasks can be split among employees who prepare the specifications, determine the number of bids to be invited, invite the bids, receive them, evaluate them, and confirm delivery of the work.
- Single source procurement: Benchmarking prices across various departments within the organization or externally against a benchmarking group can prevent inflated supplies costs and provide sourcing options.
Advanced procurement techniques such as early supplier involvement and partnerships can only be effectively adopted in an environment where the risk of procurement fraud is managed within a framework to mitigate them. The lack of such a framework constrains procurement maturity. Organizations can overcome such challenges by adopting strategies such as:
- Allocating and communicating responsibilities
- Improving processes, policies, and documentation
- Increasing visibility and analysis
These simple measures can help organizations avoid costs resulting from inferior quality of services and products, both procured and produced. This could prevent long-term financial, reputational, and health and safety-related ramifications.
For additional information, read our White Paper ‘Procurement Fraud: Are you vulnerable?‘
What does your organization employ to minimize procurement fraud?