Detecting problems quickly will depend on whether your organization has knowledgeable employees, such as auditors, inspectors, and examiners who are able to identify and prioritize critical weaknesses within your processes. By exposing and assessing indicators more efficiently, fraud will be better discovered and prevented. Here are some common types of procurement fraud and data analytics use cases to identify potential issues.

1. Bid rigging

The process of eliminating competition in the procurement process occurs when bidders agree to forgo competition, thereby denying the public a fair price.

Test:

i) Look for instances when competitors withdraw higher bids, where there are unusually high bids from one or a few competitors, or when there is only one competitor involved.

ii) Look at the amount of contracts awarded over time to determine if contractors are consistently awarded equal amounts-which may indicate bid rotation.

2. Bribes, gifts, or kickbacks

An official from the government or the procurement department receives a gift of value in order to influence their upcoming decision. While it is difficult to identify bribery, there are a few red flags that you should know about.

Test:

i) Separation of duties, to make sure that the functions of procurement, purchasing, and other decision makers are clearly separated.

ii) It is often possible to detect suspicious transactions by analyzing the payment text for clauses such as “consulting fee”, “special payment”, “one-time payment”, and “processing fee”.

iii) Please also ensure that your company has a conflict of interest policy in place whereby employees receiving gifts must register them. These gifts can then be reviewed to ensure that they meet your company’s requirements.

3. Split purchases

When a large purchase is split into multiple smaller purchases, an individual ensures that they are below the threshold to qualify for bidding and approval at the upper levels.

Test: Identify purchase orders of the same vendor, material, or creator which occurred within a certain amount of time.

4. Phantom vendors

This occurs when an employee submits an invoice from a non-existent vendor.

Test: Review your transactions for vendors with names that sound similar, vendors or employees with addresses that match, invoices that are below the threshold for additional approval, and frequent changes to your vendor master file where payments are redirected.

5. False claims

An invoice submitted by a contractor when no goods or services have been provided.

Test: See if there are duplicate purchase orders with the same vendor, the same materials, the same services, or identical quantities within a particular timeframe with repeat even-dollar transactions.

Consider using Technology to improve third-party risk management

There are therefore many reasons to adopt an automated technology-driven approach to third-party management and change traditional processes. The use of third-party risk management technology allows organizations to reduce risk in ways that are not possible with more traditional methods. Following the establishment of a third-party management process framework, automated workflows and monitoring can be implemented to reduce resources required, and the risks involved too.

Contact us to know more about Procurement Fraud Risks