Procurement fraudInvestigative techniquesto help mitigate risk
A whistleblower at a large manuacturer 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 inact ctitious while other invoices were or legitimate servicesrendered to the company. This scheme lasted several years andcost the company hundreds o thousands o dollars beore 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 paidor various supplies was two and sometimes three timeshigher than “market” value. An investigation revealed aconnection between the vendor and maintenance departmentprocurement ocer.These two real lie 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 helpul in identiying anomalies likerelationships between employees and vendors and anomaliesin the pattern o purchasing.The Association o Certied 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
. Given the increased nancial tensionin today’s economy, more and more employees couldbe eeling increased nancial pressure and reductions inresources due to layos may compromise segregation oduties potentially creating more opportunity or dishonestbehavior. In addition, because o the current economicenvironment, some employees may eel they can justiy, 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 perorm 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 inormation. 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 dicult to detect, such as payment o personal loansor credit card bills, transers 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 thenancial 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 othese situations can impair a dishonest employee’s ability toconduct business with the organization’s bestinterests in mind.