Let’s be blunt. Procurement fraud is a problem.
Orders and purchase procedures are one of the most vulnerable areas of corruption. The scale of irregularities and abuse in the procurement area is large. In fact, procurement fraud is the second-biggest economic crime after theft. Estimates suggest that businesses can lose up to 5% or even 10% of their procurement spending each year to fraud.
Procurement fraud happens at all stages of the procurement life cycle and can go on for many, many years. Each individual fraudulent transaction may be small-scale, but over time, the losses mount up.
If businesses were losing such large amounts to any other form of theft, they would certainly be making a lot of fuss. There is no question that action would be taken. Procurement fraud is, however, harder to shout about or address, because it often involves your own employees, or your trusted partners and suppliers.
In any business relationship, including an employer-employee relationship, there has to be a certain element of trust. Lose that trust, and the relationship will be damaged. If you do not trust your employees or partners, they will not put in the discretionary effort that is essential to business success. Nobody will do you any favours. Repeated audits, or other demonstrations of lack of trust, are likely to cause problems.
If you are too trusting, however, you may find that you start to have other problems. High levels of procurement fraud lead to both financial and reputational damage. Few businesses can afford to look gullible, or even an easy target. Similarly, few can afford fines from regulators because of failure to prevent corruption. There is, therefore, a fine line to walk between monitoring and trust.
Detecting and preventing procurement fraud
The problem is exacerbated because procurement fraud is notoriously difficult to detect and investigate. Manual audits rely on the skill of auditors to detect problems, and cannot provide ongoing monitoring. Fortunately, analytics can help. And in particular, analytics can help organisations with a large number of suppliers, a large number of employees and large procurement budget.
Procurement integrity solutions are able to sit above and across existing systems and examine the processes and areas of business that are most likely to be subject to fraud. They can also provide continuous monitoring. This enables fraud and audit teams to investigate rapidly and preemptively, avoiding future losses, rather than investigating after the event.
The key to analytical approaches to detecting and preventing procurement fraud is to combine data management and fraud risk scoring at multiple levels, across transactions, purchase orders, employees and suppliers. The real essential in preventing fraud, however, is to have systems that are not open to abuse; continuous monitoring of procurement systems at all levels goes some way to putting this type of system in place.
Identifying risky behaviour
Procurement integrity solutions work by identifying unusual or risky behaviour, allowing action to be taken. The use of network analytics, as in the SAS offering, means that you can look at relationships between entities. Unusual or unexpected relationships may be perfectly innocent, but they may also indicate the potential for collusion. You can decide whether to stop payments and purchase orders, either altogether or pending investigation. The ability to stop risky transactions means that low-risk transactions will proceed more smoothly, reducing holdups for other suppliers.
This is possible only by bringing together data from a wide range of sources and combining them with analytics. It is hard to do this, especially with legacy systems, but a good procurement integrity solution will manage it. The use of advanced analytics techniques – such as network analytics, clustering and pattern recognition – gives maximum opportunity to spot anomalies and therefore prevent fraud. Automating processes makes everything run more smoothly, enabling faster and better decisions.
How can smart analytics can stop procurement fraud? SAS surveyed 850 business leaders from Finance, Procurement, Internal Audit, Compliance and Ethics across EMEA to assess the landscape. Arm yourself with the facts. Download the report here.
Advantages of procurement integrity
There are real advantages to preventing procurement fraud. SAS customers typically see a return on their investment within one to two years just from the reduction in fraud. However, there are other financial benefits. Administrative costs of fraud investigation will also be lower because of the reduction in false positives. Investigations are likely to be more efficient, and regulatory compliance will be better.There are real advantages to preventing procurement fraud. SAS customers typically see a return on their investment within one to two years just from the reduction in fraud. Click To Tweet
There is another significant advantage of a good procurement integrity solution: high-quality reporting. Good visual reporting on alerts can help staff across the organisation to understand more about procurement fraud and how it can occur. This, in turn, helps to prevent it by raising awareness of good and bad practice. Creating a culture that emphasises fighting procurement fraud will provide reputational benefits: the organisation will look much less of a target, therefore making it less attractive to criminals. This sets up a virtuous circle. It’s an ongoing win-win situation and makes investment in procurement integrity start to sound essential.