Preventing fraud in procurement

It is estimated that 90% of corporate fraud occurs through contracting or purchasing. At the highest levels of an organisation, fraud usually includes corrupt valuations, where the experience of Olympus is a perfect example. Procurement level fraud, is usually a matter of collusion, where kickbacks and rewards are arranged in exchange for providing business to a supplier, something that is alleged to have happened at Edinburgh City Council recently.

At the lowest level, purchasing fraud is committed by buyers, either because they have the ability to approve the purchase of overpriced goods, make payments to non-existent suppliers or to buy goods that they can then resell later. Buyer fraud may be lower down the authority chain, but the impact can be significant, as the London Borough of Lambeth found out in 2005, when £2.8m of payments were made by a temporary member of staff to a supplier selected to carry out works by the same staff member.

Interestingly fraud is often committed by middle managers who had failed to pay enough into their pensions over their career and who are now facing the prospect of retirement with only a small income. Given that some pensions have been significantly devalued, this phenomena may increase over the coming years.

Happily, the simplest way to reduce corporate fraud, is also good procurement practice: increase competition when awarding business. Increasing the number of viable suppliers into tenders delivers greater savings opportunities and makes it much harder to act collusively. Real competition drives price transparency which, in turn, makes buyer fraud harder to execute.

Key steps for preventing procurement fraud:

1. Enforce competitive tendering and quoting wherever possible

2. Review tender specifications to prevent buyers ‘seeding’ the specification so that favoured suppliers will win the business

3. Ensure that tender panels feature staff unconnected with the current contracting provision

4. Investigate supply chains to bring as many qualified suppliers into a tender as possible

5. Monitor spend and contract prices

6. Document meetings between suppliers and the organisation leading up to a tender

7. Enforce approvals for large or frequent payments