Procurement cannot be underestimated in any company environment. This is due to the fact that it entails the acquisition of resources, goods, and services that are essential for the organization’s operations to be profitable. In carrying out these tasks in many organisations, several frauds have been found and efforts in this study are made to develop means of curbing these acquisition frauds in order to accomplish the established organizational profitability targets. In addition to the profitability of organizations, it may also contribute to growth in organizations and spares investment in companies.
Therefore, typical examples include tender rigging, single-source procurement, fraudulent billing (United States Department of Justice 2016), seller kickbacks, billing by fictional sellers, overbillings of current sellers, personal procurement with corporate funds. Others include presenting invoices for non-provided products and services, bills for payments or bribes presented for the profit or retention of business, delivery of products and services that do not fulfill stated specifications, collusion with other sellers and conspiring with workers (Wells, 2018).
Kickbacks are given in order to sway the buyer’s decision (Wells, 2018). Kickbacks can take the form of cash, favors, influence, or any other type of bribery, such as the vendor offering the insider a percentage of sales produced from the winning bid (Burchett & Morrow, 2017). This sort of fraud occurs in the first stage of the procurement process and affects all sorts of businesses. Sanofi, a French pharmaceutical corporation, was sanctioned in 2008 for paying kickbacks to government procurement officials and healthcare professionals in order to win tenders and increase product prescriptions (Agnew, 2018).
Culprits hide evidence in the aim of no one finding it, therefore observing red flags. Lucrative contracts handed to certain vendors, procurement personnel’s opulent lifestyle, staff insistence on working on specific bids, and single source procurement for certain contracts are all red signs connected with vendor bribes. The shell corporations include hurried payments to end-of-month invoices, double or irregular bills, duplicate names, and invoicing. The detection of these fraudulent procurement activities can help identify these red flags in an early stage. It can also help to reduce research.
Large organizations that make several procurements can detect fraud by investing in the advanced analytical software using shell firms (Colombant, 2019). This will assist prevent fraud and detect red flags rather than just find them after the event. For example, using software data analysis, which can rapidly discover red flags such as duplicate invoices, duplication name and organizations whose names are not on the master vendor list, the difficulties in the manual arrangement of massive data in the organization’s information system is easy to perform. The disadvantage here is the capital expenses involved in the acquisition of these tools and the consequences of fraud at the end of the business, which are reasonable for investing. An assessment of the procurement process subsequently helps detect the control problems that exist inside the organization.
Accuracy often involves internal acquisition personnel, such as employees working together, conspiring with an external supplier in in return for individual advantages such as kickbacks, bribes, gifts or other advantages to mislead the company. The common types of cooperation between employees and suppliers include an appreciation plan, tender adaptation, tender manipulation, bidding division, unwarranted sole source awards and interest conflicts (ACFE, 2013)
When an employee with significant power over the product specification or service scope of work colludes with a supplier to tailor the bid specifications to provide the provider an unfair advantage, this is known as a bid tailoring scheme. The different methods of committing an offer tailoring plan include the formulation of narrow specifications, broad guidelines, unclear requirements and abuse of order for change. Narrow specifications accommodate a certain supplier’s capabilities while disqualifying others, ensuring that the preferred provider wins the contract. Intentionally qualifying an otherwise unqualified provider by drafting exceptionally broad specifications. Intentionally omitting certain parameters when drafting imprecise requirements allows the contractor to boost the contract price later through contract variation. A supplier makes a low offer to assure contract win, with the employee’s assurance that a contract modification order will be implemented through the term of the contract to compensate for the low price.
When an employee manipulates the bid process in order to unfairly benefit a privileged supplier, an offer manipulation system occurs. A bid manipulation scheme, in essence, tries to influence the source selection process by reducing the pool of rivals from whose bids are solicited. In certain ways, bids can be made early, requests made during holidays will be called, necessary information can be ready from the favored supplier and bids will be shorter so that only the favorite provider will have time to create an extensive bid in advance (ACFE, 2013).
When an important project divides into smaller purchases, the total dollar worth of each contract remains below the threshold for competitive requirements, the bidding division scheme happens. The result is, rather than through processes that would provide the lowest or best pricing, it promotes sole source or less competitive contracted awards to a favorite provider. Bid splitting is also used to avoid signing or approving higher levels to support other schemes (ACFE, 2013).
An unreasonable single source award is sometimes used to prevent competition and to directly award contracts to the preferred provider. Such prizes can be carried out through neglecting the requirement for competitive bids, by misrepresenting sole source ratios or dividing requirements in order to prevent competitive thresholds. In that instance, the price paid by the purchaser is generally more than what a purchaser can achieve using competitive bids that generate the lowest or best price. (ACFE 2013)
A possible conflict of interest happens when personnel who hold a position of authority and trust often have a personal interest which is contrary to their official duties. These personnel can take decisions in their jobs which give an enterprise preference for themselves or their family. In return for personal advantage. For example an employee who is the procurement authority allows the award of a contract to an unskilled company for gifts from an enterprise and/or for future work by the firm for themselves or their families (typically with highly appealing pay) (ACFE, 2013).
Another sort of employee fraud is perpetrated without any external provider engagement. False billing scams like a shell business system and interests conflicts constitute the common sorts of this scam (AFCE, 2013). A plan for a shell business is introduced by the creation, through fraudulent contracts, invoices and/or payments, of an employer’s own account in shell business procurement systems by an employee or group of employees collaborating with each other. A shell corporation plan typically involves providing fictional services instead than purchasing fictitious commodities, because it is harder to verify that services have not been provided. There is, however, another sub-category of the shell company regime that involves buying commodities called as a cross-pass. The employee sets up a shell company for the organisation, rather than buying the products directly from the seller. The employee sells the goods at an inflating price from the shell firm to the company (ACFE, 2013).
A potential conflict of interest occurs, as explained above, when employees take job-related actions that give a firm a choice or a favor for their family or for their own profit. However, the employee alone can likewise commit such conflicts of interest without any involvement from the provider. For instance, an employee contracts with a non-qualified firm in which the employee has a substantial stake of the Company or in which the family member of the employee is an employee. For the second situation, giving the contract to the company can ensure its survival and indirectly guarantee the job of the family member of the employee with the company (ACFE, 2013).
Bidding rigging is an approach to prices that coordinates the price proposals of competing companies (OECD, 1993). It happens when competing firms collude in order to gain a contract for goods or services on a pre-agreed pricing for a competing enterprise. Nearly every type of tendering scheme has one thing in common: a bidding arrangement between some or all tenderers that predefines and limits the winner or eliminates competition. Offer limitations or eliminate actual competition, as it predetermines the winner and unreasonably high prices are fixed. There are five different methods of tender rigging: tender suppression, complementary bidding, tender rotation, division of the market and sub-contracting (ACFE, 2013; Office of the Connecticut Attorney General, 2009).
Additional bids, however, occur when some of the “competitive” bidders agree to submit offers, which do not aim to succeed, to allow another conspirator to win the contract. Some “competing” bidders, for example, submit bids that they know the buyer will reject because the costs are too high or because they do not allow conditions to create a legitimate bidding perception while ensuring that a “competition” pre-arranged will win a bid (ACFE, 2013).
The rotation of the bid refers to the practice of competition to win a contract. Each conspirator shall be designated as the successful bidder for some contracts, while other conspiratories may win other contracts. In fact, bid rotation is a sort of market allocation where rivals have a right to their ‘fair share’ of the overall enterprise without having to fight with others for that company. Bid rotations techniques are sometimes used, in tandem with bid elimination, similar to subcontracting systems. Firm A, for instance, may agree to submit an offer that will certainly not win this job so that company B might earn this work at a higher price. Business B will agree in exchange to do the same for the next offer. This allows firm A and company B, while providing the impression of a fair competitive bid, to take turns to win the contract effectively.
Providers who provide kickbacks frequently increase bribery prices. Furthermore, inflation in prices leads to a superimposition of the buyer’s contractual costs. To determine the growth of expenses, the use of financial analytics can be made. The analysis will establish whether the observed trend is consistent or in line with expectations. If the latter is the case, then responses to the incoherence must be explored. If explanations of trend inconsistency are achieved, skepticism and curiosity are crucial.
Wells (2018) agrees that interviews should lead to further information; physical evidence to be confirmed and a written confession to be obtained. However, it has to be chosen, especially if the firm wants to prosecute, whether or not to record the interviews before the interview starts. Wells (2018) says that neutral or third-party witnesses like salespersons should initially be examined by colleagues from other departments because material to substantiate the fraud was collected prior to the interview with the main suspect. The questions asked should be straightforward and should be geared to advise interviewees to improve the system. Wells (2018) also argues that the questioning with the suspect should begin with evidence to induce a faster confession.
Implementing adequate control systems throughout the procurement cycle is a step towards combating such fraud (Clements, 2014). Prevention measures are as important as the detective and investigative tactics described earlier on, based on the assumption that procurement fraud was an intrawork task. Writers like Guile (2013) think that the lack of awareness and comprehension of hazards is allowing procurement fraud. While that’s the case, Chugunov (2017) disagrees that acquisition fraud takes place because checks are too stiff to adjust to the red-flag patterns of fraud. Regardless of the why, the following safeguards can be used to mitigate the crystallisation of vendor kickback cases and the use of shell firms.
Chugunov (2017) claims that criminals need to be alerted through regular procurement evaluations. The preceding highlights, the seller’s kickbacks and use of fictional firms, are maintained by anybody at stages 1 and 3 of each procurement process, with requested, purchase orders, delivery orders and bills reviewed at multi-level reviewers as such. In order to assure compliance with specified standards, the received products and services should be reconciled with purchase orders and contracts. Wells (2018) suggests a comprehensive process for the approval of new sells, including the verification of the address, telephone number and tax ID number; review of company websites, contact information; audited financial statements requirements, as well as similar inspections, are appropriate schemes to tackle the system’s shell operators.
In the famous conflict between Boeing and the US Air Force in 2004, Darleen Druyun was shown to have lost all its scams since she had lots of licenses without oversight (May, 2006). Permissions ensure there are boundaries on what others can do Vendor kickbacks are commonly related with workers with many authorisations, hence limiting authorisations for staff during the procurement process. Authorisations include deletion of all existing permits and authorities should departmental workers move. This can help control the usage of shell enterprises (Guile, 2013).
Organizations must organize physical checks, such as frequent inventory checks and services to ensure that they comply with the required requirements. Organizations must review physically existing contracts and agreements before the payment of invoices for all unfamiliar or new providers. The absence of a centralized master vendor file often leads to the use of shell corporations to fraud and thus a list of permitted vendors should always be kept (Tabuena, 2010). Task segregation is an effective mechanism of control and a solution that most authors like Guile, Morrow & Davies recommend. It is necessary to separate all procedures within the procurement cycle, such as order preparation, approval, delivery confirmation, invoice treatment and invoice payments. This is a long way to discourage retrofits from vendors (Wiersema, 2002).
Other techniques such as whistleblowing, severe concerns and long-term supplier ties, awareness-raising, anti-bribery and corruption risk-taker sensitivity are also effective preventive methods to tackle supplier kickbacks and the usage of shell firms. Finally, it is necessary to follow closely the procurement lifestyles and organizations should not hesitate to prosecute fraudsters as deterrents (Olsen, 2010) – an activity that appears to expand, as procurement fraud grew six times in 2019. (KPMG, 2020).
Procurement fraud is one of the most widely used fraudulent methods in the UK, with cases filed to United Kingdom courts in 2019 worth over £16 million. This is done via collaboration between suppliers and procurement officials. Since procurement is a cycle, however, any party with knowledge, opportunity and necessity can employ this illegalness at any level in the cycle. However, contrary to other scoldings, the difficulty in detection and its tight relation with anti-corruption are considering procurement fraud a big obstacle.
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