How To Prevent Procurement Fraud?

Savings Identification and realization is a key function of Procurement in any organization, but an equally important function is maintaining compliance with corporate spend policy.

Given the sensitivity around compliance and vendor selection, it is imperative that ethics and Integrity is a key requirement from any individual in the Procurement role. However, it is not uncommon to hear tales of Procurement corruption both in public and private sector. Whether it is conflict of interest in vendor selection, or taking bribes for awarding business to a vendor, you can see multiple facets of procurement fraud across different countries. Some of this dependent on the culture of the country and some with the integrity of the people dealing with the transaction.

If you are faced with Procurement fraud in your organization, the long term impact could be devastating to the image of the department, and could be hinderance in increasing procurement influence across the organization. So as Procurement leaders, we should put strong emphasis on procurement fraud prevention.

Here are few thoughts on how Procurement fraud can be prevented

1. Define Strong Corporate Spend Policy:

It’s not uncommon to hear this excuse; that I didn't knew that I was not supposed to do that. Start with establishing a strong policy which clearly defines code of conduct. Some of the things to consider

  • What is your policy around accepting gifts from vendors. Do you allow conventional holiday gifts or not and the dollar threshold for the cost of gift

  • Vendor entertainment: Is it OK to accept vendors offer to entertainment (dinners, golf). If yes, define the cost threshold.

  • What is your process around vendor communication during an RFP. For example, any communication during the RFP should be send to all vendors.

  • Clearly define what is considered conflict of interest with examples. Also let employees know what they are supposed to do in case of doubt.

  • Clearly define the consequences of violating the policy. If this can lead to termination, clearly define that.

These are some of the key points which should be covered in the policy and not an all exhaustive list.

2. Communicate Internally

Having a policy in itself, does not prevent frauds. Make sure that the policy is communicated often to your procurement team. Here are few ideas on how this can be handled

  • Make sure this is part of your induction plan for new team members. Make sure that code of conduct is explained to new members of the procurement team.

  • Have  a refresher every 6- 9 months along with other key policies.

  • For other stakeholders who are involved in vendor selection, make sure they are aware of this policy.

  • Better yet, if you have a FAQ section in the requisitioning/Procure to Pay system, list all the policy related questions there.

 The goal is to ensure that Procurement team is aware of these policies. As a Procurement leader, encourage your team to ask questions in case of any doubts or a scenario which is not listed in the policy.

3. Communicate Externally

Your vendors should be fully aware of the policy around gifts, entertainment etc. Most of you should have a supplier code of conduct, you can create a section in the policy or have a vendor FAQ section.

Some of the points to consider

  • What is your Company’s policy around vendor presenting gifts to either procurement team or other stakeholders. Some companies are lenient and some are not, whatever your policy is, list it very clearly.

  • Clearly define the consequences of violating the policy. For example, if the vendor is participating in a RFP, then violating the policy could lead to disqualification from the process and added to the permanent Supplier blacklist.

  • Make sure that vendors are aware of your policies around RFP’s. Whether it is when you run a RFP or how you run the RFP. Better aware your vendors,  the less they will go off track.

This doesn’t guarantee that Procurement fraud won’t happen but atleast you are taking steps towards preventing it.

  4. Conduct regular Audits

Make sure there are regular audits of this policy, As procurement leaders, you can’t look at each and every vendor engagement, but having regular audits, allow you to randomly pick couple of engagements and see whether they meet your policy or not. Some ideas on how this can be implemented

  • Work with internal audit group to define controls around this policy, and then define a measurement period. If this is part of your formal control process, then audit becomes much easier.

  • If that is not an option, then have someone within your group conduct regular audits based on a fixed schedule.

  • You can always ask your team to self report the gifts they received from the vendors, but some might see this is an over-restrictive measure.

The intent is to measure compliance to the policy, the method might vary from company to company due to company culture or team structure.

5. Monitor Spend Trends

Monitoring your spend trends can help you identify patterns if any of the vendor is getting a preferential treatment, for reasons other than for the company benefit. The intent is  to identify anomalies in spend patterns. Some of the ideas on how to implement this

  • Clearly define the sourcing strategy around key categories. For example, you might have decided that you want to be single source in a given category. So in that case, it is not an anomaly even though your entire spend for that category is with that single supplier

  • Look for trends where the supplier spend has increased significantly that doesn’t match your demand forecast for that category.

  • For categories which are multi-source, if all of a sudden one vendor is getting a large share of the pie than what they used to, could be a potential flag. There could be legitimate reasons for it (Better price,better quality), but worth an investigation.

If you have a very strong category management process, then finding these anomalies becomes much easier.

6. Hire people with Integrity

There is no substitute for high integrity and ethical standards, ensuring that people in your team have high integrity and ethical standards is the ultimate solution to prevent procurement fraud.

  • Make sure that you have a process to assess this during the interview process.

  • Present hypothetical situations in the interview process and see how they react to it. For example, a vendor offers to take them out for golf, during an active RFP process. The way they react to it should be able to give you a good idea on how they will react once they join your team.

  • Ask their general views on fraud in procurement, see how aware they are and what has been their experience dealing with it.

I am no way implying that procurement lacks integrity, but prevention is the best medicine. A single instance of procurement fraud can taint the image of procurement department for years to come.

Before you start implementing any measure to prevent procurement fraud, talk to your team, explain why these measures. That way, it is not seen as micro management but effective measure to maintain higher integrity and ethical standards within procurement.