In the first part of our article series on procurement fraud, we looked at what procurement fraud is and why it poses should a big risk to the public sector.  In this second article, we look at the red flags associated with procurement fraud in relation to the procurement cycle.  What should you be looking out for in order to identify procurement fraud?

Procurement fraud can occur at any stage of the procurement cycle, from planning to contract award and performance evaluation.  It is, therefore, very important to remain vigilant throughout the process in order to identify any misuse of funds or abuse of power by internal or external sources.

Procurement professionals, or those dealing with the procurement team, should look out for the below internal and external red flags, which could indicate that your business is a victim, or is at risk of becoming a victim, of procurement fraud. The best way to mitigate against procurement fraud risk is to have well-defined governance, controls and principles in place (which we will address in our third and final article).  All too often, however, we see shortcuts emerging in organisations' processes and controls within the procurement cycle. Such shortcuts create weaknesses in the cycle and provide opportunities for fraudsters to exploit (sometimes undetected for quite some time).

It is important to be familiar with the red flags associated with procurement fraud so you can spot whether or not it is happening in your organisation.  Even if it is not, it is still important to undertake risk assessments of your procurement cycle (as we will discuss in our third article in this series).  Referring to the below red flags can assist with this exercise and help you identify where processes and controls may need to be tightened to ensure your organisation is more resilient to procurement fraud.

Red flags

There are many red flags that could indicate that procurement fraud is being committed.  We have identified some particularly key ones (although this list is by no means exhaustive).  We have split the red flags listed into "people" and "process" to assist with identification.

People:

• Do any of your employees or colleagues have a desire to keep control of the procurement process or part of it?  For example, does an individual not take much annual leave, do they operate in unusual working hours, are they overly protective of a supplier or left to their own devices and not supervised?
• An individual in your organisation may display an unusually close relationship with a supplier or, following some simple checks, there may be connections between that individual and a supplier, for example, the same address or bank details.

• Does an individual have complete control over a process from start to finish i.e. is there a lack of segregation of duties?  If an individual has control over, for example, entering payment information and approving payments, it creates an opportunity to commit fraud.
• Is there evidence that an individual has submitted false expense and timesheet claims?  Other indicators might be that an individual has ordering goods for their personal gain or has stolen sensitive data (or facilitated the same to a supplier or other third party).
• Does a procurement officer have a personal interest in a particular supplier or do they have relationships with suppliers outside of their official?  This could be evidence of a conflict of interest, which creates an opportunity to abuse the procurement process.
• Is there evidence that an individual is living beyond their means?

Process:

• Has a supplier been selected without a competitive bidding process or is a supplier not qualified for the services required?  Are viable bids being rejected?
• As procurement professionals will know, it is essential for the procurement process to be properly documented including specifications, quotations and contracts.  If there is a lack of documentation evidencing the process adopted, it can be an indicator of fraudulent activity.
• Are goods or services priced significantly higher than the market rates?  This can be a sign of collusion or receipt of kickbacks from vendors to procurement officers in exchange for being awarded contracts.
• Are there a lot of small contracts?  Large bidding packages can be split up into smaller contracts to encourage competition among local firms.  While this is not a clear indication of fraud, having multiple small contracts to manage can create opportunities for fraud, corruption and collusion to occur.  The procurement process for these contracts should be managed carefully to avoid such opportunities being created.
• Are your organisation's bidding patterns unusual?  When a supplier consistently wins bids without much competition or prices very low compared to other bidders, it could be an indication of collusion within the process.  Sometimes, groups of companies work together to rig bids as well i.e. making the process look more competitive than it is and inflate costs.
• Have you performed checks on the bidders?  Simple checks can identify whether a bidder is real or a "shell" company that exists in name only and does not trade.
• You should be aware of "bait and switch" frauds, which is where a firm enters a bid under false pretences e.g. it promises things it can't deliver with an intention to substitute with another contractor after the contract has been signed.
• Are works or services being performed to a good standard after a bidder has won a contract?  If not, it could suggest that the successful contractor is trying to recover costs by delivering lower quality works or services than specified in the agreed contract.

Conclusion

The above red flags just show the possible opportunities that fraudsters could exploit in the procurement cycle if you aren't careful.  In our third and final article in this series, we look at what proactive steps you can take to prevent procurement fraud in your organisation.