Procurement Fraud — Everything a Procurement Professional Should Know

Procurement fraud is a very harmful activity to every company. Unfortunately, it is a common practice in companies even though it is prohibited. 

In this article, we will define what procurement fraud is. We will identify what constitutes fraud and how to lessen this activity in your company.

After this article, you should be able to turn the tips into actions that can minimize the activity of procurement fraud. This will allow your company to protect its reputation and also address the reasons why an employee defrauds. 

Procurement Fraud

Companies usually transact with other businesses to acquire services it needs to continue their operation or development. Big companies normally open a bidding process to select a business they will contract to work on their project. Many businesses will compete to get the contract when the bidding process starts. 

This process is where procurement fraud usually starts.  Procurement fraud is defined as an illegal act that intends to manipulate the procurement process. It manipulates the procurement process by gaining an unfair advantage in the process of acquiring contracts, supplies, and services.

Procurement fraud happens when there is deception or unfairness during the procurement process. For example, the company has awarded the contract to a bidder who had conspired with the employee of the company. Activities like this are widespread in the procurement process. 

It is important to know how procurement fraud happens and how to lessen it to maintain the company’s reputation. This is also to maintain the company’s assets and its core values.

Editor's note:

Hi there! My name is Marijn Overvest, I'm the founder of Procurement Tactics.
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Procurement Fraud Triangle

There are some cases where employees may commit fraud even if the company has given incentives. You may wonder why it happens. Where did you go wrong in training your employees? 

There are multiple reasons behind this. But these are the three main reasons why employees commit fraud in accordance with the Associations of Certified Fraud Examiners (ACFE). 

1. Perceived financial instability 

The employee will see it as a window to commit fraud when experiencing financial problems. Financial problems can come from sudden expenses, personal debts, or living beyond your means. 

2. Perceived Opportunity 

There will be an opportunity to commit fraud when an employee knows how to bend the controls in a company. Having the knowledge of how to conceal and hide transactions can lead an employee to commit fraud. 

3. Rationalization 

Procurement fraud starts when an employee justifies the intention to cheat in order to gain benefit. Thoughts like “I deserved to be well-compensated” can be an opening to commit fraud. 

Different Types of Procurement Fraud

Now we know the causes why employees commit procurement fraud. It’s time for us to tackle its different types to identify if an employee is committing procurement fraud. 

1. Employees collaborating with suppliers 

Among the other types, employees collaborating with suppliers is the most common type of procurement fraud. This happens when an employee is assigned to purchase from a related supplier at a much higher price. This results in a sub-standard quality of the purchase product or service. 

Due to the omission of fraud, the employee and the supplier will both benefit from their actions. Employees collaborating with suppliers to defraud the company is widespread. It is common in companies with no definitive sourcing process. 

Another is when the procurement process is in the hands of an individual or a specific department. This can impact the company’s reputation when you get inferior raw materials to produce your products. 

Acquiring inferior raw materials for your products will weaken the quality.

2. Overcharging the invoice

This fraud happens when there is an inflated invoice from the suppliers. Overcharging the invoice is done with caution by the supplier to conceal it when the audit comes. 

One example of this is including services or products that are not provided or although they look the same, are of inferior quality to the product you expected. 

3. Companies set up by employees to commit procurement fraud

This type of fraud consists of a few employees creating fake companies. This type of fraud might be uncommon, but this will cost you the most. 

This happens when the employees keep issuing payments to their fake companies. The issuance of payments might be small so as not to cause suspicion among them. Yet, it will harm your company severely over time. 

4. Conflict of Interest

You may think that you have overall control of the company. But fraud is different when there is a conflict of interest. 

Conflict of interest occurs when an employee will select a vendor for the company related to it. It is not wrong to choose a bidder that you know. Conflict of interest becomes harmful if you choose a particular bidder when conducting the selection process. 

It becomes damaging to the company when self-interest has become a priority rather than the company’s interest. 

Mitigating Procurement Fraud

Every company has dealt with different types of procurement fraud for years. Yet, there is no definite solution to stop it. 

There are ways to lessen procurement fraud though you may not end it all at once. Let’s now discuss different ways to fight procurement fraud.

1. Train employees in the standard procurement process

Training is a must to equip your employees like in every other company. You should teach your employees your procurement process to make sure that how they choose is aligned with your standard.

2. Informing suppliers of your rules regarding the procurement process

The suppliers must know the requirements and rules before entering the procurement process. Suppliers must have read the conditions regarding the process so acts arising from conflict of interest can be dealt with accordingly. 

Some employees may still find a loophole with this, but at least employees will be wary of the consequences of their actions. 

3. Strengthen auditing of purchasing controls 

The audit department shall be strengthened to find if there are any anomalies with the purchasing transactions. 

The audit department must have a randomized selection of receipts of the transactions to ensure that there are no loopholes. 

4. The whole procurement process is not controlled by one individual

In minimizing procurement fraud in your company, no one should have absolute control regarding the purchasing process. 

To keep it simple, a single employee should not have all the tasks assigned to him in the purchasing process. 

Putting different people to different tasks will help lessen the chances of procurement fraud. You can also delegate the tasks to different departments to ensure that no one is colluding with one another. 

5. Utilizing automation to control purchasing processes

Technology has been one of the biggest things that humanity has created. Automation does not only help to improve productivity, but it can also improve control in your company.

Automation has lessened the anomalies that happen when transacting with suppliers in the past. An automated system wherein it can ensure that approval from different levels of your company can mitigate procurement fraud. 

Automation can also ensure that the purchased order item is not a fraudulent purchase. With automation, you can ensure that the data from the purchases you have made are stored in a system. This is where you can review all the purchase history when the need arises.

In Conclusion…

Procurement fraud is rampant in many companies and some have considered it normal. You must know that you can minimize it and its damaging effects on your company although it may not be removed entirely. 

You should know that there are possible ways to prevent procurement fraud in your company. Preventing fraud before it gets worse is what you need to do. Implementing the ways to minimize the damages we had discussed will surely be successful when it is the goal of everyone. 

You must be proactive in these things before you incur any losses in the company. But remember not to put too much pressure on your employees. Everything has its balance. The employees’ health should not be a trade-off in implementing ways to prevent procurement fraud. 

Frequently asked questions

1. What is procurement fraud?

Procurement fraud is the manipulation of the procurement process to gain an unfair advantage. 

2. Why does procurement fraud occur?

It occurs due to employees seeing an opportunity to defraud their company. 

3. Is there a possible way to completely stop procurement fraud?

Unfortunately, it cannot be eradicated completely. However, there are ways to minimize procurement fraud in a company. 

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