Procurement Fraud: When Purchases Cost More Than They Should

How much leeway does your purchasing department and vendors have? Unfortunately, procurement fraud is a fact of life in the business world. Whether the fraud is perpetrated by dishonest vendors, staff members or both and occurs through kickbacks, short deliveries or another scam, it’s vital to learn how to identify and prevent it from happening again.

What it looks like

When procurement fraud involves cash payments to employees, it can be difficult to detect because those payments aren’t reflected in your books. However, they’re probably reflected in higher pricing. If you find you’re paying higher prices for lower quality, you may simply be a victim of marketplace fluctuations. On the other hand, procurement fraud could be occurring if you see:

  • Consistent supply shortages
  • Informal communication (such as cell phone calls or personal emails) between your purchasing staff and vendors
  • Poor record-keeping

The most common procurement fraud scheme involves payments to fictitious companies. To uncover such fraud, scrutinize sequentially numbered invoices from a single vendor, invoices from companies that have only post-office box addresses and invoice amounts that are consistently just below sums that must be approved for payment.

Look, too, for connections between your procurement staff and your vendors. Is one of your employees related to the owner or management? If so, that employee shouldn’t be making purchasing decisions that involve that vendor.

Prevention is the best medicine

As with any type of fraud, the best way to avoid procurement problems is to take preventive steps. For example:

Develop a code of ethics. Define the standards by which you expect your employees and vendors to conduct business, and communicate them in writing.

Set up a hotline — or two. Establish two confidential hotlines: one for employees and a separate one for vendors to report any suspicious or questionable activities.

Qualify vendors. Check vendors’ affiliations, ownership, litigation, regulatory or legal violations or suspensions, and financial standing before doing business with them.

Review your records. Periodically review vendor address and telephone matches that could indicate that two purportedly different companies are, in fact, the same or related. Also look for proof that supplies or services were delivered as ordered and that there are no billing and payment anomalies.

Guard your reputation

Procurement and purchasing present virtually limitless opportunities for fraud perpetrators. JLK Rosenberger can help you put policies in place to block those opportunities. If you have questions about fraud or want to discuss a fraud prevention strategy for your business, call us at 949-860-9902 or click here to contact us.

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