Daily Archives: March 4, 2015

Societal Damnation 41: Fraud and Corruption

Fraud and Corruption is everywhere and running havoc on your organization and your supply chain. A recent Kroll Global Fraud Report in late 2013 found that 70% of companies were affected by fraud in the prior 12 months, which represented an increase of 15% over the previous twelve months. In other words, at the time, 7 in 10 companies were hit by fraud in the previous year. But it gets worse. The Economist at the same time also found that fraud was on the rise and predicted that it would continue to rise. If the rate of increase remained steady, then 4 of 5 businesses got hit with fraud last year and 9 out of 10 business will get hit with fraud this year. Yowzers!

Moreover, Procurement Fraud can be particularly costly and damaging, in both the public and private sectors. For example, a recent article over on Supply Management on how Councils [were] told to do more to tackle Procurement Found found that there were 107,000 cases of Procurement fraud detected by local authorities in 2012-2013 that combined accounted for £s; 178 million! And this is just a drop in the bucket when compared to the total amount lost by the UK public sector to fraudulent purchasing on an annual basis, an amount that was estimated at £s;2,300 million in 2012! Zoinks!

It’s harder to find good numbers for the US, but a 2011 report by Computer Evidence Specialists found that Fraud cost the US $1.32 Trillion in 2010, of which 733 Billion was Corporate (with 68% committed by corporations and 32% committed by employees). This number might sound surprising but when you consider that between 2000 and 2007 a small South Carolina parts supplier collected about 20.5 Million from the Pentagon between 2000 and 2006 in fraudulent shipping charges, including $998,798 for sending two 19-cent washers to an Army base in Texas, it puts things in a different light. (Source M4Carbine.net archives.) Hamana, hamana!

If your organization is not on full alert 24/7, it is going to get hit with fraud from somewhere in the organization or the supply chain. It’s just a matter of time before an attempt is made. This fraud can take many forms, which can include, but are not limited to:

  • invoices from non-existent suppliers
    usually submitted by an employee for services (not received) or goods of questionable origin to try and defraud the company of money (or by a random third party trying to hope a small invoice slips through unnoticed)
  • invoices from suppliers for off-contract goods and services
    usually for smaller dollar amounts for services “to be received” or for goods that are priced above standard list price for “emergency provision and delivery” where a supplier is trying to eek out more revenue or an employee is colluding to get a kickback
  • bait-and-switch
    where the supplier promises you the newest high-end laptop with the top-of-the-line processor and memory chips, but you actually get last year’s model which has depreciated 30% less (because, not being an IT shop, the supplier thinks you won’t know the difference) or charges you for Grade 5 Bolts when in fact they are only Grade 2 Bolts (and which you intend to use in commercial busses used to transport passengers, giving you a legal liability as well as a case of fraud)
  • inflated T&E claims
    where meetings across town are 50 miles instead of 10, all meals are $1 below the per diem limits, significant “entertainment” charges (especially on the first and last day where the employee or manager was actually entertaining friends and relatives), etc. (or, and this happened, the same receipt is accidentally submitted on consecutive expense reports)
  • inflated performance claims
    where a buyer “negotiates” a year-end rebate in exchange for guaranteed volume at unnecessarily higher prices next year so that he can exceed his savings target and get a bigger bonus
  • “lost” / “damaged” stock
    that is “walked” off the truck by an employee during a pre-lot entry inspection or, if the merchandise is un-returnable / too costly to return, declared damaged and purchased at pennies at the dollars by an employee who will resell the undamaged products on his own

In other words, fraud can happen anywhere, and at any time, and if a Procurement organization is not vigilant, it will happen to them. Fortunately, steps can be taken to reduce the chances of most of these frauds. Having a policy that invoices will only be accepted from approved suppliers, that all invoices from approved suppliers for non-contracted goods and services and/or for goods and services at non-contracted rates will prevent most external fraud from slipping through the system. (Collusion can still bypass the best of controls, but, unless the system is hacked, you know exactly who perpetrated the fraud in this instance.) Having T&E limits without budget manager approval, automatic zip-code based mileage checks, and fixed per-diems (while more costly) can weed out a lot of T&E fraud. Careful inspections and a two-step process can minimize the chances of a bait-and-switch and good stock being written off. And waiting a quarter to verify the numbers then and now before issuing a bonus will discourage many employees from trying to inflate their savings (or sales) claims.

However, no system is perfect and a lot of process transformation, and diligence, will be required to minimize the risk of fraud and corruption and limits its impact if it does happen. For Procurement, it’s another damned if you do (as the effort takes time and resources away from good category management that is often the largest source of value generation) and damned if you don’t (as the losses from a single fraud could wipe out most of the captured savings).