While fraud is a big topic these days, procurement fraud can often be overlooked. This impact has massive potential, as losses add up quickly and/or reputations become permanently damaged, as mentioned in Jim's article.
What to Look for in Procurement Fraud
Due to understanding the risk that procurement fraud poses, some companies take strides by having meetings, posting ethics statements, and taking other measures. But what actually works? What makes a difference?
Interestingly enough, there was a study done that showed that the 1) characteristics of a committee - the one(s) you're in at the moment, 2) the characteristics of the company itself, and 3) the environment in procurement all have significant influences on fraud.
What doesn't influence fraud? The fancy ethics statements on the walls, the risk assessments, and the systems and procedures developed (to perhaps even prevent fraud).
The big takeaway is: Company culture matters.
So if you're hoping to either spot or prevent procurement fraud, procedures won't help you. Which brings us to our next point, a non-intuitive law about numbers.
Benford's Law
Benford's Law is a curious observation, which states that with a large group of (real-life) numbers, the first digit of numbers (31,818) is not evenly distributed. Instead, lower numbers as the first digit appear more frequently than higher numbers. You'll see 1, 2, and 3 more often, and 7, 8, and 9 less often.
So in a fraud-free procurement dataset, about:
30% of numbers should start with 1
18% with 2
12% with 3
...and so on, decreasing up to 9.
This works with all sorts of number sets, from measuring the distance of rivers, to the number of followers individuals have on social media. It's amazing.
If you want to get familiar with using Benford's Law in examining data, go to this Journal of Accountancy page, which gives a good explanation for how to use it to detect fraud in a spreadsheet or any group of numbers.
How to Stop Procurement Fraud
Know what to look for. The most important thing to remember, is that people are extremely poor at attributing bad intentions to people they like. (Just because you're friends with someone doesn't make them innocent.) Watch for unusual behaviors: does an individual go to the bank frequently or even daily? Are coworkers living beyond their means? Is someone at work irritable, bullying or secretive? These are all big, red flags, and don't be afraid to dig deeper.
There are (of course) companies which you can hire that specialize in auditing for fraudulent transactions. But what works the very best, time and time again, is the simple tip line. Whether it's a phone line, or email or a web page, have something set up so people can submit fraud tips. The Association of Certified Fraud Examiners (did you know there is one?) say that's how the most fraud gets caught. These tip lines provide a high success rate, for a low cost.
So to detect and prevent procurement fraud from happening, or at least interrupt it significantly, focus on the qualities of your workplace environments, use Benford's Law as a quick test when looking over numbers, and watch for red flags in coworkers' behavior.
And set up that tip line, your best and cheapest anti-fraud tool.
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