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Procurement Fraud Investigative Techniques-Deloitte

Procurement Fraud Investigative Techniques-Deloitte

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Published by lacegear
Deloitte's March 2010 publication: Procurement fraud:
Investigative techniques to help mitigate risk.
Deloitte's March 2010 publication: Procurement fraud:
Investigative techniques to help mitigate risk.

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Published by: lacegear on Apr 21, 2010
Copyright:Attribution Non-commercial


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Procurement fraudInvestigative techniquesto help mitigate risk
A whistleblower at a large manuacturer alleged that anemployee in the procurement department was colluding witha vendor to bill the company or security services that wereallegedly never rendered. The investigation revealed severallarge round dollar invoices billed or security at events thatthe company had no record o ever occurring. The vendoradmitted in an interview that some o the invoices were inact ctitious while other invoices were or legitimate servicesrendered to the company. This scheme lasted several years andcost the company hundreds o thousands o dollars beore thewhistleblower, who worked or the employee in procurement,tipped o internal audit.An analysis o purchases by the maintenance departmento another large company revealed that the price paidor various supplies was two and sometimes three timeshigher than “market” value. An investigation revealed aconnection between the vendor and maintenance departmentprocurement ocer.These two real lie examples have a common thread. Bothcompanies had controls in place such as segregation o dutiesand supervisor approval that were either overridden by eithercollusion or abuse o approval authorities. Learning rom theinvestigative process that uncovered the techniques used toperpetrate the rauds, and employing similar investigativetechniques to assess procurement activity on a periodic,proactive basis may be helpul in identiying anomalies likerelationships between employees and vendors and anomaliesin the pattern o purchasing.The Association o Certied Fraud Examiners describesoccupational raud as
the use of one’s occupation for personalenrichment through the deliberate misuse or misapplicationof the employing organization’s resources or assets
. Fraudis a potential risk in most businesses. Organizations instill acertain amount o trust in their employees in order to operate,and those within the procurement unction are entrusted withaccess to vendor selection, vendor les, accounts payable,invoice approval, and purchase orders, which can providean opportunity to commit raudulent activity such as bidrigging, alse billing schemes, vendor kickbacks, and confictso interest. Whether the employee is a purchasing agent,controller, accounts payable manager, or any other employeeessential to the operations o a business, a dishonest employeecan present a potential raud risk or the organization.The degree o risk a business may ace can be assessed byexamining Donald Cressey’s Fraud Triangle and determiningi any o its actors might be an issue or employeeswith purchasing responsibilities. Cressey proposed thatemployees are more likely to commit raud i three actorsexist: 1)
incentives and pressures
, 2)
. Given the increased nancial tensionin today’s economy, more and more employees couldbe eeling increased nancial pressure and reductions inresources due to layos may compromise segregation oduties potentially creating more opportunity or dishonestbehavior. In addition, because o the current economicenvironment, some employees may eel they can justiy, orrationalize, their behavior. This situation can be perceivedas an ideal opportunity by dishonest employees, includingthose who might be involved in procurement duties withinan organization. I dishonest employees eel an increasedpressure to perorm or produce results, and i an organizationis simultaneously lacking appropriate controls and segregationo duties, such employees might view this situation as anopportunity to use their procurement role to commit raud.Some o the methods a procurement employee may use tocommit potential raud include:
. Kickbacks are the giving or receiving anythingo value to infuence a business decision. Kickbacks may beundisclosed payments made by vendors to employees inreturn or avorable treatment, such as bid rigging or insidebidding inormation. The vendor may also approach anemployee about submitting or approving invoices or goodsor services that were never received, and in exchange thevendor provides the employee with a kickback. Kickbackscan be payments o cash, but can also be in a orm that ismore dicult to detect, such as payment o personal loansor credit card bills, transers o property or vehicles at lessthan air market value, lavish vacations, or a hidden interestin the vendor’s business.
Conficts o interest
. I an employee has an interest in thenancial well-being o a vendor, a confict o interest couldexist. This may take the orm o being a part-owner in thevendor company, or knowing someone close, e.g., a spouseor other amily member, who works or the vendor and canreceive rewards or business the employee provides. Any othese situations can impair a dishonest employee’s ability toconduct business with the organization’s bestinterests in mind.

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