Essential Steps for Safeguarding Against Procurement Fraud

Posted on May 22, 2023 at 09:05 PM

Every year, companies lose billions of dollars to procurement fraud. Procurement fraud, whether inflated invoices, faked bids, or phantom vendors, chip away at corporate profits. Left unchecked, it can seriously damage a company's bottom line, reputation, and supplier relationships.

Procurement fraud can significantly drain your company’s resources and reputation, but it doesn’t have to be. Here are some tips to help you identify, prevent and recover from procurement fraud.

What is Procurement fraud, and how does it happen?

Procurement fraud occurs when someone manipulates information or influence to obtain an advantage or gain in a business transaction or cause corruption or loss. The most common form of procurement fraud is bribery, where a person offers or accepts money or other benefits in exchange for preferential treatment on a contract.

However, procurement fraud can occur at any stage of the procurement process, pricing products, choosing vendors, or managing inventory items. It can happen through false bank statements or billing, fake prices or unfair deals or any deliberate attempt to tamper with the procurement process in a way that will cause harm to the company. 

The problem with procurement fraud is that it's easy to hide and difficult to detect. It's also an area where many organisations need more compliance programs. However, there's always a price to pay when fraud happens. 

What are the types of procurement fraud?

Regarding procurement fraud, dishonest employees and suppliers can steal from your company in many ways. Understanding the different types of scams can help you recognise red flags and strengthen your internal controls to prevent losses. Some types of procurement fraud schemes include the following:

• Bid rigging: Bid rigging happens when companies collude to fix bidding prices so that only one company gets the contract. Bid rigging can also involve collusion between government officials and contractors to award contracts to specific companies at inflating prices and be considered a federal criminal act.

• Kickbacks: Kickbacks are payments made by a contractor to an official or employee of a company with which they are doing business in exchange for preferential treatment on contracts or project approvals.

• Skimming: Skimming is a white-collar crime that happens when funds earmarked for public projects are diverted into private hands through fraudulent means such as falsifying invoices, forging documents and hiding costs from clients or government officials overseeing the project being funded.

How to safeguard against procurement fraud?

Procurement fraud costs businesses billions of dollars each year. While some cases of fraud may seem impossible to prevent, there are proactive steps companies can take to safeguard themselves. If you wish to protect your company against procurement fraud, here are a few tips that will help you through the process: 

• Conduct due diligence on new suppliers.

Conducting due diligence on a new supplier or vendor is one of the essential defective steps to protect yourself from fraud. You should perform background checks and check references before allowing any new vendors to work for you. While this might seem common sense, many companies need help to do this essential step and get burned by unscrupulous vendors.

• Use risk assessment tools.

Many companies use risk assessment tools as a way of identifying potential areas where there may be fraudulent activity occurring within their organisation. These tools can help identify areas where a higher risk of fraud arises, allowing businesses to implement countermeasures before committing any crime.

For example, if you have an overseas location with little oversight, then that is likely an area where procurement fraud may occur. Using a risk assessment tool or some administrative force like an experienced attorney will help you determine how much oversight this location should have and what kinds of processes should be implemented to mitigate risk in this area.

• Monitor Procurement Activities

Another way to prevent procurement fraud is to conduct investigations and monitor your company’s procurement activities. Measuring procurement performance includes both internal and external transactions. You can do this by creating a policy requiring all purchases above a specific dollar amount to be approved by someone not involved in the purchase or sales process that led up to it. By having an outside party review these transactions, you can help ensure that they are legitimate and have not been influenced by fraudulent activity.

• Establish Clear Policies and Procedures

Another way to defraud your procurement process is to establish clear policies and procedures for purchasing goods or services. These should include rules about creating contracts, what information must be included, who can approve purchases, and more.

Suppose you have a purchasing department that handles these transactions on behalf of other departments within your organisation. In that case, they should also have policies and procedures governing their operations.

Procurement training courses In Dubai can teach you how to establish clear policies and handle other procurement fraud techniques in the best way possible.

• Implement whistleblowing

Whistleblowers play a vital role in the fight against procurement fraud. A whistleblower is an individual who reports illegal or unethical activity within an organisation. But how do they help with procurement fraud?

Whistleblowers can help to expose fraudulent activities, protect the company from financial losses, and prevent reputational damage. The best way to use whistleblowing is to design an anonymous procedure for individuals of the company to report any deception or fraud through a safe form or complaint box. This way, the company's management can receive these claims and investigate without causing employee conflict.

All in All 

Fixing procurement fraud and other corrupt matters is an obligation for the success of any company; securing your company against bribes and other forms of fraud is the way to win a spot at the head of the successful competition.