Creating an anti-fraud culture

Procurement fraud is a serious risk to your organisation. Approximately 6% of company revenues are lost to fraud. Of this, half is accounted for by procurement fraud - deceits perpetrated by individuals in order to gain unfair benefits or rewards on the back of purchasing from external suppliers.

Employees commit 82% of identified fraud. (Source: Fraud - The Unmanaged Risk, Ernst & Young Survey, June 2000, UK.) Rogue suppliers are only effective if they collude with willing accomplices inside the client company.

Openness is the only way to get across the message that procurement fraud will not be tolerated.

Bill Hoggarth, MD, SAS in SA.

Moreover, the greater the degree of trust placed in the employee, the greater the risk of serious fraud: losses from fraud caused by managers and executives are roughly 16 times greater than those caused by non-managerial employees. Yet in today`s commercial environment, companies often have no choice but to flatten management hierarchies and put ever-greater trust in managers and employees to get on with the job.

If you allow a corrupt business culture to flourish, the short-term impact of fraud on the bottom line will be the least of your worries. Of far greater consequence is the lasting impact on your relationships with investors, customers and honest business partners and suppliers.

Procurement fraudsters exploit loopholes and weaknesses in supply chain management procedures, so your starting point must be to understand the risks. It is up to procurement professionals, who understand the procedures best, to lead the process of risk assessment. If they don`t, the danger is that corporate colleagues in the legal or financial areas (for example) may step in and seek to control the procurement process through rules that appear to be strict but may well be ineffective or inappropriate.

It is worth bearing in mind in this context that in the new world of e-business and e-procurement, it is still human beings who defraud organisations. The large volume and rapid turnover of transactions provides new opportunities for the cunning individual to hide fraudulent purchases.

Separation of responsibilities is key. The same person should not be selecting suppliers, ordering and receiving goods, or processing and paying invoices.

If possible, seek the advice of a fraud detection expert who knows the typical scams. And consider all aspects of the business. Procurement fraudsters often succeed in peripheral activities in the organisation (for example marketing, office supplies, printing and so on) that do not attract the spotlight of attention as does the core business.

Don`t treat fraud as the family`s dark secret, never to be discussed. Openness is the only way to get across the message that procurement fraud will not be tolerated. An open and positive working environment will also help remove perceived workplace injustices that are often the initial motivation for fraud.

Institute awareness training and draw up a clear, written code of practice covering issues such as the acceptance of gifts and hospitality.

The anti-fraud tone has to be set from the top. Employees who view their managers as honest are more inclined to emulate that behaviour. Employees who see their managers behaving dishonestly will feel they have an excuse for doing likewise.

Senior managers must encourage whistle-blowers. Many cases of procurement fraud are uncovered by tips and complaints from honest employees who are uncomfortable about the activities of others. Every large organisation should have an internal hotline enabling employees to give tip-offs on corrupt practices.

Trust is the cornerstone of good employer-employee relations and an effective workforce, but as we have seen, breach of that trust is common to all forms of procurement fraud. Therefore it is essential to strike a commonsense balance between trusting employees too much and too little. Controls should be as non-intrusive as possible, should be built into routine processes and consistently applied.

Employee checks should be carried out at the recruitment stage. Offenders who have been discharged from previous positions but whose fraud has not been publicly exposed move on to other organisations and continue their pattern of abuse.

Supplier checks should be thorough. A large proportion of procurement fraud is carried on through phoney suppliers.

Invoice checks should be carried out as a matter of course using random sampling and specific checks of large one-off payments.

Procurement fraud detection was discussed at length in the second of these Industry Insights, but it is worth emphasising that "cure" is perhaps the best form of "prevention". Fraud is most likely to be deterred if the fraudster knows that there is a strong risk of being caught.

Remember that detecting and deterring fraud is a team effort. You will need to bring together expert fraud investigators, people who understand your procurement processes and industry, or domain experts who can identify combinations and linkages that appear perfectly innocent to a layperson. Using today`s data mining software techniques, this expertise can be built into fraud detection models to dramatically reduce the time spent detecting fraud, and to reduce the risk of false accusations.

Above all, take a commonsense and level attitude to deterring fraud. Except in clear cases of theft, prosecution may have to be a last resort for two reasons: fraud is notoriously difficult and expensive to prove, and pursuing minor offences may attract bad publicity and lower the organisation`s morale. Most fraudsters start small. Success fuels their ambitions. So early detection of minor offences will often prevent more serious ones.

If you do decide to prosecute, make sure you have assembled sufficient evidence to win, but also ensure it is well summarised and presented: remember you have to convince a magistrate or judge.

Technology may be your biggest asset here. Applying simple, clear graphics to illustrate complex commercial data or financial transactions can help the judge or magistrate to see through the intricacies and the jargon. Whereas in the past courts had no choice but to sift through mountains of lever arch files, today computer screens can be used to enable greater focus on the case in hand.

Every organisation has a duty to protect its stakeholders` money. Sending a clear message to all fraudsters that you know what is going on, their card is marked and fraud won`t be tolerated is the best way to stop it in its tracks.

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