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Julianne Bambacas | 04 Apr 2022 | 6 min read
How Software Can Help Prevent Procurement Fraud
Can having the right software solutions in place help you prevent procurement fraud? In this article, we’ll investigate the several types of procurement fraud, the risks involved and how software can help fight it.
Unfortunately, procurement fraud is a constant risk in both public and private organisations globally.
Take these examples close to home. In Perth, ABC News reported: “The assistant director general of WA’s Department of Communities has been charged with allegedly stealing more than $2.5m of public money in what could prove to be one of Australia’s most serious cases of public sector corruption.”
Meanwhile in Melbourne ABC News reported: “It’s been an explosive week at the Independent Broad-based Anti-Corruption Commission’s (IBAC) hearings into allegations at the City of Casey. The public hearings have blown open allegations of a high-flying developer trying to pay off not just councillors, but state political candidates, a community group and Aboriginal leaders.”
What is Procurement Fraud?
Let us first look at what ‘procurement’ means: it is the purchasing of goods and services which offer the best value for money, fulfil the required functions in a specified time and at the agreed quality levels.
So, in the light of this definition, procurement fraud would be the corruption of these values for personal gain through dishonest and criminal means.
Types of Fraud in Procurement
Procurement fraud can take many different forms, but here are a few examples:
- Kickbacks and bribery
- Dubious vendor relationships
- Conflicts of interest
- Use of insider information
- Conspiring with staff to inflate prices
- Phantom supplier companies and orders
- Billing fraud, e.g., duplicate invoicing, invoicing for work not done, etc.
- Intentional sub-quality goods or services
- Bid rigging and high-price collusion among bidders
- Splitting purchases to avoid scrutiny by remaining below the approval threshold
- Writing the tender requirements in such a way that one bidder is favoured, or only one can qualify
Procurement Fraud Risks and Consequences
Besides the risk of criminal prosecution, consequences of committing procurement fraud can include:
- Substandard goods or services that create a safety risk
- Financial implications
- Reputational impact
- Ethical and environmental implications
- Endangering the success of an overall project
On a sobering note, the end results of rampant corruption, especially in government and state-owned enterprises, can be frightening. As Colin Cram, Specialist Procurement Consultant, says:
“Corruption kills people. It destroys jobs, economies and motivation. It can reduce investment from other countries and set back economic hopes. Infrastructure can fail. Living standards and life expectancy can be badly reduced.”
How to Catch Procurement Fraud Using Software
Procurement is one of the foundational functions of a business and large amounts of money can flow through a procurement department, or at least be overseen by it. This makes procurement activity especially vulnerable to fraud, both internally and along the supply chain.
Most fraud cases happen where there is a lack of internal control. A person sees an opportunity and takes a chance, particularly when they’re confident they won’t get caught. While procurement software may be implemented to drive efficiency or for other reasons, a well-designed solution will also shut down these opportunities.
Here are some ways software can help with preventing procurement fraud:
1. Data analytics
Fraud can creep in anywhere along the supply chain, not just as part of the bid process. Sometimes it’s a complex web to navigate, especially with the increasing speed and complexity of business. It requires consistent monitoring to conduct proper checks and obtain the full picture. A manual system would never be able to ‘keep an eye’ on such an intricate chain.
Advanced data analysis is effective in sifting out fraudulent activities and makes it harder for the perpetrator to hide. It searches for trends and uses spend analysis to check for unusual and unexplained spending.
Data analytics helps to raise red flags on suspicious behaviour and reveals patterns and anomalies that may signal procurement fraud, such as:
- An increase in after-hours transactions
- Suspicious connections, e.g., the same addresses or bank accounts
- Deals and transactions approved by unauthorised employees
- Conflicts of interest
- Unnecessary intermediaries
- Suspicious “gifts”
2. Coded-in compliance
Human nature is weak, so we need to make it hard to give in to temptation. Besides deliberate corruption, we know that not all non-compliance cases are intentional but may result from genuine mistakes or misunderstandings. Sometimes, it's not clear to staff what business processes they should be following, since not everyone is as knowledgeable as the members of a procurement team.
To help ensure compliance, all business rules, codes of conduct and compliance requirements can be encoded into an automated process. So, by configuring your procurement software properly, it can become a compliance management tool (For more, read “What is Compliance by Default? How it Helps Procurement”).
3. Digital workflow to map an automated path of procedures
Since procurement is a complex process involving many players, it can be easy to hide fraudulent activities. However, fraud can be prevented in the procurement process by configuring the software to manage workflows, digital signoffs, approvals and escalations. And when all procurement activities are tracked, there is a clear audit trail that can be analysed.
The system should:
- Have checks and balances with multiple levels of signoff where required
- Monitor the procurement life cycle from the planning stages to contract management
- Check for things like duplicate deliveries, non-delivery, etc.
- Provide process control, e.g., stock checking
- Provide a detailed document history
4. Cross-departmental system integration
If each department acts in its own silo with its own system, there is room for shady behaviour. On the other hand, integration helps to close the loopholes. For example, integration of the auditing and financial software with the procurement software helps to check for inconsistencies, such as supplier invoices not matching payments and deliveries.
5. Strict supplier management and screening
Rigorous due diligence done on suppliers is a crucial part of preventing fraud. You need to check their financial stability, reputation, track record, conflicts of interest, ethical culture, etc. This also forms the basis of good vendor management.
You should also have a single, central supplier database to avoid duplicates and only be able to use suppliers on the approved lists. Another good practise is to check how much of the work is going to be sub-contracted by your suppliers and to whom.
6. Use digital tender software
Bidding fraud is always a risk and can be hard to pick up. By using a digital tender system, the tender management process is improved and the opportunities for corruption are greatly reduced.
7. System controlled permissions structure for segregation of duties
A well-known method of procurement fraud prevention is making sure that one person doesn’t have too much unmonitored control. By using the procurement software to control permissions, you can segregate roles and set up checks and balances that are automated and fully logged by the management system.
Prevention is Better than Cure
The financial, legal and reputational costs of procurement fraud can far outweigh the cost of preventing it. If you consider the actual amounts stolen by the culprits and the legal costs of claims, coupled with the knock to your good name in the business world, you cannot afford to carry on as usual. Since the technology exists that can help prevent and detect procurement fraud, it makes sense to employ it.
For more information on how we can help you with your procurement management software needs, contact us to speak to one of our solution specialists.
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