The rapid growth of Business Process Outsourcing (BPO) has been accompanied by an increase in procurement fraud in the recent years. It is vital that organizations are aware of the risks of fraud in their internal processes for buying goods and services.
How Procurement Fraud Takes Place
The common forms of procurement fraud include vendor kickbacks, bid rigging, price fixing, conflict of interest, general mismanagement, product substitution, and outright theft. An employee may conspire with an outside supplier to defraud the employer in different ways in return for some type of kick back, remuneration, bribe, gift, or other benefits. Procurement fraud can also occur when an employee (or employees working together) establishes a dummy company or supplier account in the company’s systems and then works to steal from the employer via fraudulent contracts, invoices, and/or payments.
In one case, a company observed that when one of its buyers was moved to a different category, a number of the suppliers appeared to move along with him. The buyer’s jump to another category was actually part of a planned move. But the surprising thing is that the categories of goods were very different. Upon investigation, it was found that some of the suppliers were nothing more than middlemen sourcing product for the buyer. The net effect is that the company was defrauded, incurring heavy costs that should it not have.
Other instance of procurement fraud:
- Sometimes employees make purchase decisions in favor of vendors for whom they have special financial interest. This may help vendors with inflated rates for their projects or services.
- Phantom vendors can enter the scene if someone alters master vendor files. Phantom vendors are fictitious suppliers who do not have any valid relationship with the buyer.
- Invoices may be raised for goods or services that a vendor may have never provided
Such instances of fraud incidents cause direct loss to the company as well as severely damage its reputation. Fraud incidents may also results in civil or criminal liabilities for the company.
Preventing Procurement Fraud
According to a survey of 959 Certified Fraud Examiners on Occupational Fraud & Abuse conducted by the Association of Certified Fraud Examiners (ACFE), US organizations are losing nearly 7 percent of their annual revenues to fraud each year. Here are some ways of addressing procurement fraud:
- Segregation of duties is one of the most effective methods, as it separates the responsibility for supplier selection, the negotiation of the contract and the purchase decision from single personnel.
- Performing frequent audits to prevent unusual cash management, payment practices, and intervention of phantom vendors is another suitable method.
- Investigation of suppliers before partnering with them
- Keeping a single supplier database, contracts register, and payment address for vendor selection
Verify and validate supplier data when selecting vendors. Employees must be trained to recognize fraudulent practices and also made aware of the company’s standards for ethical conduct. Every business should have a fraud monitoring mechanism in place. Before partnering with a BPO company, check out its reputation. Reliable BPO companies ensure transparency in all their operations.