Procurement Fraud: When Purchases Cost More Than They Should

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31 Jul Procurement Fraud: When Purchases Cost More Than They Should

Procurement fraud is pervasive in businesses, whether by dishonest vendors, a company’s own staff, or both. Kickbacks, short deliveries, and other scams are all perpetrated through purchasing departments. Here is how to identify and prevent it from happening again.

What it looks like

When procurement fraud involves cash payments to employees, it can be difficult to detect because those payments are not reflected in your books. However, they are probably reflected in higher pricing. If you find you are paying higher prices for lower quality, you may simply be a victim of marketplace fluctuations. On the other hand, procurement fraud could be occurring if you see:

  • Consistent supply shortages
  • Informal communication (such as cell phone calls or personal emails) between your purchasing staff and vendors
  • Poor record-keeping

The most common procurement fraud scheme involves payments to fictitious companies. To uncover such fraud, scrutinize sequentially numbered invoices from a single vendor, invoices from companies that have only post-office box addresses, and invoice amounts that are consistently just below sums that must be approved for payment.

Look, too, for connections between your procurement staff and your vendors. Is one of your employees related to the owner or management? If so, that employee should not be making purchasing decisions that involve that vendor.

Prevention is the best medicine

As with any type of fraud, the best way to avoid procurement problems is to take preventive steps. For example:

Develop a code of ethics. Define the standards by which you expect your employees and vendors to conduct business and communicate them in writing.

Set up a hotline — or two. Establish two confidential hotlines: one for employees and a separate one for vendors to report any suspicious or questionable activities.

Qualify vendors. Check vendors’ affiliations, ownership, litigation, regulatory or legal violations or suspensions, and financial standing before doing business with them.

Review your records. Periodically review vendor address and telephone matches that could indicate that two purportedly different companies are, in fact, the same or related. Also, look for proof that supplies or services were delivered as ordered and there are no billing and payment anomalies.

Guard your reputation

Procurement and purchasing present virtually limitless opportunities for fraud perpetrators. We can help you put policies in place that block those opportunities.