A few years ago, PwC announced that procurement fraud was the second most-commonly reported economic crime worldwide. It’s a broad term, covering everything from bid rigging and supplier collusion to duplicate invoicing and expenses fraud. In a nutshell, though, it’s what happens when your employees or supplier network fiddle the books to their own benefit, and it’s stinging businesses of all varieties.
If it’s so common, you’d think that prevention measures would be as prevalent in business as ID cards and credit card controls – but that’s far from the case. PwC’s assessment still stands in 2019. Procurement fraud drains millions from the economy every year simply because organisations are failing to confront it.
Businesses underestimate the threat of fraud
Many industries are in denial over the true extent of procurement fraud or reluctant to properly investigate it. Often they don’t understand the motivations behind it – fraudulent activity can be a form of revenge as well as theft – and some may not want to probe too deeply into the cracks in their organisation to expose what’s happening.
There’s also the question of personal motivation. Businesses need to be on the lookout for more than just barefaced theft – they need to be aware of high-risk, disgruntled employees looking for a way to hurt the company. Or, more insidiously, the nice, well-behaved team members who’ve inadvertently discovered a loophole or weak point in the approval chain and, well, fancy the prospect of a slightly swollen pay check…not to forget the dishonest supplier that has identified ways of increasing prices, cashing in on duplicate invoices or not delivering goods while going unnoticed.
More straightforwardly, most companies just wouldn’t know how to address the problem if they did find evidence of it – how do you spot abuses of trust in amidst the constant flow of day-to-day business, and how do you distinguish fraud from incompetence? Good business runs on trust, so it’s important to preserve your employees’ sense of independence while also putting sensible checks in place to detect and prevent fraud.
Improving your fraud defences
At present, too many companies are using manual checks which are too slow and inflexible to keep up with the ever-evolving nature of fraud. The manual approach is vulnerable to abuse and deception: who checks the checker?
The problem is much greater than businesses often anticipate, due to a range of complex factors – reputational fears, insufficient insight and technology – leaving many businesses in denial or naïve to the dangers it presents. So the question is how can organisations fight a problem that they’re unlikely to ever know about until after it’s happened, sometimes on a significant scale? Discovering the unknown unknowns can prove challenging at best! Preventing them from happening in the first place is even more of a daunting challenge.
One way to make anti-fraud efforts more effective is to include advanced analytics and machine learning in your processes. Continuous, data-driven detection is the best way to fight procurement fraud and detect errors as well as process breaches. It enables companies to pre-empt fraud rather than simply discover it after it’s taken place. Analytics limits costs, saves time and prevents losses. By applying predictive analytics and AI-driven tools to large amounts of data (be it supplier, employee or transactional information), companies can rapidly spot patterns and anomalies in their cash flow with far greater accuracy and granularity, helping them pull up false claims and dodgy transfers quickly. Machine learning capabilities can also help reduce false positives since self-learning algorithms spot fraud with increasing accuracy the more they are trained.
There is a reticence in the market to invest here – implementing these technologies requires an upfront cost yet it can quickly lead to a far greater saving in the fraud it detects and prevents. To come back to the cybersecurity analogy, no one decides against buying antivirus because of the start-up cost: they know the benefits far outweigh the expense. It’s the same with procurement fraud. Why leave yourself open to corruption for the sake of reducing capex?
What businesses don’t see can hurt them. Until organisations adopt an integrated, data-driven approach, millions will continue to be lost to procurement fraud. Companies must be able to spot errors and fraud anywhere during the procurement cycle, from bid to contract execution. Analytics holds the key to making that a reality.
We’ve just completed a comprehensive piece of research looking at how organisations are currently set up to tackle procurement fraud, what the challenges are and what their experience of this type of fraud has been to date. We will be sharing some revealing insights very soon.