Does procurement integrity really matter? Fighting procurement fraud and optimizing procurement cycles is difficult, not least because it often involves employees. Asking your employees to police each other can cause problems, because it implies a lack of trust, and trust is what relationships are built on. If you undermine the trust, you also undermine the relationship, and therefore the ‘glue’ that binds your organisation together. This probably also explains why a visit from the internal audit or compliance department is not usually greeted with shouts of joy: because their job is to question the actions of their fellow-employees, they find it harder to build good relationships with them.
Making sure that third parties whether they are suppliers, vendors or external sales consultants is not any easier since data is often scarce, not necessarily up to date and collusions as well as ill-intentioned behaviour difficult to identify.
Fraud is a moral, financial and reputational question
Hard though it is to manage, procurement integrity does matter, and it matters a lot. In the first place, there is the moral imperative to prevent crime. You might argue that procurement fraud does not really hurt anyone, but that way lies anarchy. In a civilized society, we agree to live by rules. Those who break the rules for their own benefit should not be able to get away with it. This is the thinking behind the pressure from regulators to act against corruption, including the EU Anti-Corruption Act (2003), the OECD Convention on combating bribery (2011), Gesetz zur Bekämpfung der Korruption (2015), the UK’s Bribery Act (2010) and the latest French Sapin 2 regulation enacted June of this year. It is also the reason why fines, for example in bribery cases, are going up.
Procurement fraud also matters financially. It is, in fact, the second biggest economic crime after theft, in terms of losses, and some estimates suggest that businesses lose around 5% per year of procurement spend as a result. Losses from government procurement fraud in one department alone, the US Department of Justice, were estimated to be over $1 billion in 2015. The risk of procurement fraud is also estimated to be increasing. In other words, not only is this is a huge issue, but it is getting bigger.
Fraud also results in reputational damage both to companies and individuals. Those responsible for fraud can, and will, be taken to court and may well end up in jail. Companies end up looking at best naïve, and at worst arrogant, stupid, or negligent. It is fair to say that none of those is good for their image.
Maintaining integrity requires positive action
Preventing fraud, including procurement fraud, goes well beyond theory and regulations. It is definitely not a tick-box exercise, either. It requires organisations to translate legislation into a positive impact on their company, employees and business partners.
Focus needs to be given to supporting an ethical business culture, to making sure procurement cycles are not prone to errors, exceptions or corruption. Further attention is needed in improving risk mitigation and handling the difficult legal challenges. In procurement, particular focus needs to be given to due diligence around third parties including vendors, suppliers, partners, agents and joint ventures, as problems may arise through bid-rigging, price inflation and double-billing if strong processes are not put in place. Ghost entities, lack of respect of contractually established prices, collusions and dubious purchase orders also pose a number of additional challenges.
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In practice, this means that there is no single approach that will detect all kinds of fraud, errors, exceptions or even all kinds of procurement fraud. A hybrid approach is needed, including analytical approach combining business rules, analysis of outliners, comparisons with external source of company descriptive data and link analysis amongst suppliers or between suppliers and employees. Systems need to include due diligence when working with new third parties, enhanced due diligence procedures for high risk activities or partners, regular risk scoring of external entities, and continuous alert generation based on transactional data, data discrepancies and associations between entities. Systems would also benefit from integrating information from whistleblowing cases to provide a complete risk assessment.
The problem of false alerts
But there is another issue: systems need to generate alerts, but not result in too many false positives. They must therefore be sensitive, but not over-sensitive, and highly specific. And bearing in mind the speed at which money can be lost through fraud, it must be possible to update systems rapidly to respond to new threats, without waiting weeks for the IT team to have time to help with developing and testing scenarios.
Solutions to ensure procurement integrity really need to be able to ingest heterogeneous types of data from multiple back office, accounting and HR systems. Only then can internal teams speed up assessments and audits as well as document cases for further investigation or prosecution.
In answer to the original question, yes, making sure you maintain integrity all along the procurement cycle and prevent procurement fraud does matter. And thanks to good quality solutions, it is now much more possible. Can you afford to turn a blind eye?