The procurement function is a strategic link. Many of us have experienced a few surprises in access to certain products in recent years, when we had taken it for granted that these products would be available at all times.
Corporate fraud can take many forms, including procurement fraud, which encompasses a whole range of schemes: misappropriation of assets, bid rigging and falsification (collusion, bribery), delivered or non-compliant goods (counterfeit products), false invoicing, and so on.
Fraud losses reach a new all-time high in Canada in 2023, as reported on the Anti-Fraud Centre website. Procurement fraud is no exception.
In response to the COVID-19 pandemic, many organizations and government agencies took swift decisions on loans, grants and contracts with potential business partners. As a result, public procurement processes and legal frameworks may not have been followed as rigorously as usual, resulting in lower quality goods, price gouging, inflated invoices, the involvement of inexperienced suppliers and a general inability to source.
What are the risks for your company?
The risks for your company are :
- Financial losses;
- Damage to reputation;
- Investigation and prosecution costs.
Example 1: trusted suppliers
An investigation was carried out into a number of medical products that had been ordered in an emergency situation, but whose delivery was delayed. A supplier, operating in a different sector, had come forward with a promise to deliver the required products quickly. Given the urgency of the situation, invoices were approved and paid before the products arrived.
However, the said supplier had neither the contacts nor the equipment needed to meet the terms of his commitment. The investigation revealed that the required materials had never been purchased. The intermediary company handling the transaction confirmed that the order for the materials had never been placed by this supplier.
Tips:
- Build long-term relationships with your suppliers of goods and services (knowledge); and
- Carry out periodic due diligence on your suppliers, as well as an audit on all new suppliers.
Example 2: Price gouging or inflated invoices
Price gouging and inflated bills are more common. An organization’s supplier invoices the customer for a higher amount without providing the quality of the products in return for the prices on the invoice, or without providing the quantity invoiced. For example, used materials may be invoiced at the same price as new materials. This increases the supplier’s profit, to the detriment of the organization, which quickly finds itself with a shortfall.
Tips:
- Use technology that can help you analyze data to spot any anomalies, such as sudden increases in product quantities or price and/or late deliveries;
- Plan your purchases according to your needs; and
- Check the quality and quantity of your products as soon as you receive them, to identify any errors or irregularities as early as possible.
Example 3: billing for services not rendered
The same situation can also arise when billing for services not rendered to the customer. The supplier invoices for more hours than actually worked on a project, or adds hours for ghost employees to the invoice. One organization investigated a similar situation, in which collusion, bid-rigging and, ultimately, false invoices for work rendered were detected.
Tips:
Make sure you have a supplier approval process. Note that for some suppliers, including those who have access to your data, a security survey could be a good option for testing their probity.
A few best practices to combat procurement fraud
Here are a few best practices against supply chain fraud that Demers Beaulne’s Consulting Services team can help you with:
- Introduce a well-defined procurement policy with delegation powers according to the hierarchical levels of your organization;
- Monitor changes in your cost of goods; and
- Preparing and distributing training to employees on procurement-related risks is always an excellent means of prevention.
And don’t forget:
- Provide adequate supervision of employees involved in the supplier payment process;
- Introduce methods for monitoring the number of contracts awarded to a supplier, in order to identify cases where the value of a contract has been divided into several contracts to avoid, for example, approvals from a superior; and
- Have managers who play a decision-making role in awarding and managing contracts that are important to your organization sign forms confirming that they have no conflict of interest with the supplier.
According to the report by theAssociation of Certified Fraud Examiners, there is a correlation between the monitoring measures in place in the organization and the reduction :
- The amount of fraud;
- the length of time it has been perpetrated; and
- The time elapsed before detection.
Let’s be alert and take collective action to reduce the incidence of fraud with :
- An assessment of inherent risks;
- Supplier due diligence; and
- Managing conflicts of interest.
DEMERS BEAULNE CONSULTING SERVICES
What are your supply risks?
We can help you carry out a risk analysis, carry out proactive detection and implement internal controls to reduce the losses associated with this type of fraud.
Don’t hesitate to contact us.
