How to Detect and Prevent Fraud in Your Procurement Department

How to Detect and Prevent Fraud in Your Procurement Department

Conflicts of interest, inflated prices and subpar goods and services can lead to major financial losses. Here’s how to protect your organization from procurement fraud.

According to PwC's 2020 Global Economic Crime and Fraud Survey, procurement fraud comprises 19 per cent of all fraud. Unfortunately, it's not usually unethical vendors working alone. The survey reports that fraud is committed by an employee alone or an employee and an external party working together 57 per cent of the time.

Combatting fraud in your procurement department is key to maintaining an ethical business and protecting your company's finances and reputation. Here's how to detect and prevent procurement fraud schemes in your organization.

Prevent procurement fraud in four steps

In addition to more complex fraud control measures, there are also simple actions you can take to make your organization more ethical, open and honest. Download our free cheat sheet to learn four steps toward better fraud prevention.

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What are Common Procurement Fraud Schemes?

"Procurement fraud is often ‘quid pro quo’, whereby a favour or advantage is given in exchange for something," says David P. Nolan, Executive Vice President of Global Risk Solutions at Klink & Co.

In other words, procurement employees award a vendor a contract and get something for themselves in return. An employee might do this because they:

  • Have a personal connection to the vendor: The vendor is the employee's family member or friend. By awarding the vendor the contract, the employee enjoys fulfillment in their relationship and/or shares in the financial rewards of the contract.
  • Are a silent partner of the vendor: The employee is secretly part owner of the vendor's business and will experience financial gain when the vendor wins the contract.
  • Receive bribes and kickbacks: The vendor offers the employee gifts or a share of their earnings in exchange for a contract. These could include anything from money to membership at a country club to luxury goods.
RELATED: How to Detect and Prevent Fraud in Your HR Department

In practice, procurement fraud can be carried out in a number of ways, usually with the employee and vendor working together. When a procurement employee personally benefits from choosing a vendor, they might:

  • Tailor contract requirements so only their vendor meets them all perfectly
  • Choose a new vendor over others that the organization has used before
  • Leak contract information to their vendor before bidding is open
  • Not open bids publicly
  • Accept a late bid or re-bid from their vendor
  • Disqualify the real winning vendor for minor reasons so they can accept their vendor's bid
  • Purchase more goods/services than needed to receive more kickbacks
  • Pay a higher price than market rates (more kickbacks)

Small procurement departments with just one or a handful of employees are at a higher risk of fraud. With little to no oversight, employees have more opportunities to choose a vendor based on personal gain rather than what's best for their employer.

How to Detect and Prevent Procurement Fraud

Set up a Hotline

Most employees want to be honest and will report their coworkers' suspicious behavior. Employees who are "on the ground" might notice changes in behavior or strange vendor choices that managers could miss. Their feedback is invaluable to detecting procurement fraud early, as well as focusing preventive efforts.

Implement an easy-to-use ethics hotline to help detect not only procurement fraud, but all ethics, compliance and fraud concerns organization-wide. Offer multiple reporting options (e.g. phone line, email, online portal) and communicate where to find and how to use each one to all employees.

Require Anti-Fraud Training

If you don't teach staff what fraud looks like, they might not be able to recognize when their coworker (or they) cross the line. Require training for all employees on detecting and preventing fraud and ethics and compliance lapses.

Provide specific examples of fraud schemes employees might see in their department, including red flags of each one. Explain how to report suspected fraud. Finally, explain how fraud can hurt both your organization and the employee if they get caught.

Choose Vendors Carefully

One employee vouching for a vendor isn't enough when choosing who your organization does business with. Conduct a thorough risk assessment of every vendor before you decide who gets the contract.

In addition to assessing each vendor based on criteria that matter to your company (e.g. financial stability, data security, etc.), run credit checks, read news stories and check public records about them. This ensures you only hire vendors that are reliable, honest and have no ties to anyone at your organization.

RELATED: Battling Procurement Fraud Using Data and Diligence

Audit Vendor Lists Frequently

Auditing your procurement department often can also help prevent fraud. Schedule audits every six months, and throw in a few surprise audits throughout the year, too.

When analyzing your company's procurement documents, note price increases and prices that seem high compared to other vendors. If a long-term vendor was replaced with a new one, find out why. Check vendor addresses and telephone numbers against employee addresses and telephone numbers to uncover fraudulent vendors.

Rotate and Supervise Procurement Staff

When you give procurement employees too many responsibilities, you open your organization up to fraud. One employee should not be solely responsible for choosing bids, communicating with vendors and negotiating contracts.

Require procurement staff to share and/or rotate tasks to detect schemes faster and prevent fraud. In addition, increase oversight of procurement staff at every level. Employees will feel more supported while also having fewer opportunities to hide corrupt procurement practices.

Encourage Open Communication

Finally, foster a work environment where employees feel safe speaking up. Honest, open communication is key not only to staff reporting their coworkers' behavior, but also admitting when they've made a mistake.

A company culture where employees can talk openly with their managers also builds trust and a feeling of belonging. As a result, employees will feel happier and more comfortable at work, making them less likely to defraud your organization.

What would you do if you detected procurement fraud in your organization today? A thorough, clear plan gets all employees on the same page for a faster resolution. Download our free fraud response plan template to get started.