Fraud in procurement is one of the oldest and most common schemes in the business world. Yet, in spite of its notoriety, it continues unnoticed or uninterrupted in nearly every industry. Globally, the cost of procurement fraud reaches into the billions (by some estimates, trillions) of dollars every year. However, it can be hard to wrap your head around just how this can happen. So together, let’s break down just what procurement fraud entails and where it’s likely to happen.
What Is Procurement Fraud?
Procurement fraud is the act of manipulating a company’s procurement process in order to gain some advantage, compensation, or something else of value. This most often involves procurement managers, or others involved in a company’s buying process, striking private deals with suppliers or contractors, although a broad variety of other scenarios for procurement fraud can take place.
It’s often summed up that procurement fraud can and does occur when there is the all-too-common combination of motivation and opportunity. Ultimately, these actions can end up costing businesses and shareholders the most by way of paying unfair market value for their procurement process.
Procurement Fraud in Small-to-Medium Enterprises (SMEs)
It’s an unfortunate fact that most SMEs don’t put much effort into detecting fraud within their organization. This mostly comes down to not having the additional resources to dedicate to such focused expenditure. And while SMEs are much less at risk than other larger organizations, they are by no means exempt from procurement fraud.
In the very early stages of a business, procurement fraud is difficult-to-impossible to commit simply because ‘procurement’ doesn’t really exist. Any staff outside of the founders is minimal and all expenditures are sure to go through the owners.
As a business grows, the owners are less likely to be involved in the direct management of the premises. In such a case, they are likely to have hired an office manager who is uniquely authorized to make purchases in the name of the business. Again, the potential for procurement fraud is small when all purchases and expenditures go through this office manager, who in turn reports directly to the owners.
Procurement Fraud in Large Enterprises
As businesses expand to a point where multiple people are authorized to make company purchases, the potential for fraud begins to rear its face. In this stage of company growth, several employees beyond the founders and office manager may have access to company credit cards for business expenditures. There is likely to be an automated software system for making procurement purchase orders.
Such conditions present the opportunity for fraud to occur, and with opportunity, there might be employees who are willing to take advantage. Without proper safeguards in place, it may (statistically speaking) only be a matter of time.
Procurement Fraud in Emerging Markets
Emerging markets represent perhaps the largest haven of fraud within the business world. In many emerging economies, bribes and kickbacks are simply considered part of the process to get things done in business. These, along with lax oversight and regulations, foster an environment conducive to emerging fraud opportunities.
The details of recent cases documented in several Asian markets have brought to light many such large-scale schemes. Though the situations varied, whether by company or by country, participants in interviews admitted that bribes are expected as a part of the contract bidding process. Additionally, so is bribing government inspectors.
Cases in emerging markets may be the most difficult to either detect or combat, as your company may not have any direct influence in the target supplier or region. In this case, the practice continues unabated as part of doing business, and is something to be wary of when considering expanding your procurement operations into such markets.
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