Risk & Economy » Fraud » Four steps for beating procurement fraud

Procurement fraud is always a difficult subject. No one wants to think their employees or suppliers are trying to defraud them, but it’s imperative that companies keep on top of anti-fraud efforts. When these activities are discovered too late, it isn’t just the targeted companies who suffer. The financial cost for victims can be severe and the reputational fallout for the business even worse.

If you think procurement fraud isn’t a problem in your organisation, you may be in for a rude awakening. New SAS research reveals that almost a third (31 per cent) of UK businesses have been victims of contract bid rigging between suppliers, and 43 per cent have received fraudulent duplicate invoices. According to PwC, procurement fraud has ranked as the world’s second most common economic crime since 2014.

Procurement fraud is a widespread issue and, in the worst cases, can become systemic in an organisation if left unchecked. However, it isn’t unbeatable. With the right tools and approach it’s possible to stop procurement fraud before it even begins.

To reclaim control over your procurement process, follow these steps:

Recognise the risk 

 One reason procurement fraud is so prominent but so little talked about is that too many assume its impact is small. Indeed, a third of companies don’t consider it important enough to include it in their auditing processes. Yet, recognising the risk it poses may give a company the impetus it needs to nip procurement fraud in the bud.

It’s important to acknowledge that guarding against procurement fraud isn’t a fire-and-forget exercise. Fraud can occur at any stage of the procurement process or during any point of the supplier relationship. One general audit a year won’t be enough to stay on top of it.

Organisations should follow a regime of continuous end-to-end controls of the entire procure-to-pay chain, with constant detection processes and regular audits. However, delivering on this may well require technology and capabilities currently beyond their reach. We’ll come to these capabilities and how to implement them shortly.

Coming to grasp unknown unknowns is challenging at best. It’s easy to ignore what you neither want to see or address.

Consider your culture

Many companies struggle to tackle procurement fraud due to a lack of awareness and communication internally. Departments don’t collaborate, data is siloed and the processes aren’t in place for the easy sharing of data between them. Procurement fraud can arise in any part of an organisation, so it’s crucial for everyone to be involved.

At the same time, however, there must be a designated fraud leader within the organisation. Even dedicated employees will miss signs and make mistakes, so there must be someone whose sole responsibility is to detect and resolve fraud. In 31 per cent of cases, the CFO or financial controller is handed this responsibility, but they aren’t always the best choice for the job. Ultimately, your fraud leader should have a detailed understanding of internal fraud detection capabilities, daily contact with any anti-fraud personnel, and the expertise to change strategy to meet ongoing and incoming threats.

Identify improvements

 Another obstacle to beating procurement fraud is a lack of sufficient technology and in-house capabilities. Too many organisations rely on outdated technologies and methods of fraud detection, including rules-based software and manual controls. Once again, where humans are central to the process error is certain and the prospect of tampering can’t be ruled out. These methods can detect procurement fraud, but slowly and only after the fact once the damage has been done.

It’s up to businesses to regularly review and assess current detection mechanisms and allocate budget where improvements can be made. To do this, it’s also crucial to spot problems that could frustrate future tech adoption, whether it’s a lack of skills or disconnected data silos. Once the foundation has been laid, you can then start implementing the best tools for the job; analytics and artificial intelligence (AI).

Apply analytics

Continuous data-driven detection affords companies the best chance of holding procurement fraud at bay (and keep it that way). Advanced analytics and AI can process and analyse staggering amounts of data in seconds, picking up on patterns, outliers and anomalies otherwise missed and alerting investigators before the actual fraud takes place. While both take upfront investment to install, the costs are quickly covered and even surpassed in the money saved for the business.

However, it’s crucial that you pick the solution – and deployment – that’s right for your organisation. Solutions developed in-house are rarely the best approach and risk an investment of substantial time and money for capabilities already on the market. A scalable solution can take you up the analytics maturity curve from business rules to anomaly detection, predictive modelling and text analytics. Networks can then be deployed in the cloud, hosted or on-premise.

Companies of different sizes have different needs. Larger companies, for example, tend to have more complex supply chains and procurement processes where wrongdoing is more likely to go unnoticed; smaller ones need more packaged solution requiring less data science knowledge.  Best-of-breed solutions that identify the most fraud with the least false positives while preventing future cases are a must for all.

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