By Pedro Paulo, CEO, Gatewit

According to the 2013 Kroll Global Fraud Report published last month, 70 per cent of companies worldwide incurred losses as a result of fraud last year. The report stated that procurement fraud, affecting 20 per cent of companies, was the fastest growing category, up from 12 per cent over the past 12 months.

Despite its growth though, fraud advisor Paul Guile warned buyers at the recent CIPS Annual Conference that the full extent of fraud remained unknown, and was under-recognised as a risk.

A report by the European Anti-Fraud Office (OLAF) revealed that £1.84 billion was lost between eight EU member states in 2010 due to fraud and corruption in the public sector supply chain. This shocking figure makes it quite clear that procurement fraud is an issue that needs to be tackled with improved vigilance and prevention.

In order to better recognise fraudulent practices, it’s worth considering some of the more common techniques, which can be categorised into four types: bid rigging, which accounted for almost half (48 per cent) of procurement fraud, kickbacks, conflicts of interest, and general mismanagement.

Examples of these include the following:

Procurement personnel can make purchasing decisions biased toward a vendor in whom they have a financial interest, and vendors can send gifts to procurement staff, which may put undue pressure on those staff to act in their favour.

Vendors might also enjoy inflated rates for projects and services due to collusion with procurement personnel around the vendor selection or bidding process.

By colluding with procurement personnel within a company, an employee or third party can manipulate the vendor master file so that payment is directed either to a ‘phantom vendor’ - a fictitious company, or a real company that doesn’t actually supply anything to that business.

In a similar vein, invoices can be raised that do not relate to goods or services that have been provided by a vendor, and signatures can be forged on manual cheques, which can then often be lost in the sheer volume of a business’s financial transactions.

More insidious than this though, is the practice of vendors colluding with procurement staff to effectively bypass a company’s procurement controls in order to fraudulently divert money from the business.

To help identify incidents of these practices as they occur, it’s worth looking for signs such as changes in spending patterns, schedules, orders or times. Other warning signs include a lack of control and competition around the bidding process, along with low initial bids from vendors followed by excessive revisions in costs.

We’d also recommend being mindful of an excessive number of invoices with round values, and of repeated invoices with non-sequential numbers from any one particular vendor. Suppliers should be regularly and frequently audited to make sure that payments aren’t being made to any ‘phantom vendors’, and accounts departments should immediately raise any examples of cash management or payment practices that they consider to be unusual.

It’s important for procurement personnel to be aware of these anomalies, as well as regularly auditing their vendor list, ensuring that it’s kept current and accurate. Modern e-procurement solutions can help businesses to reduce the risk of fraud by offering greater transparency in managing vendor lists.

By raising awareness of the possibility of procurement fraud, and by putting robust monitoring processes in place, a company will be taking the right steps to minimising risk. And by ensuring that both the company and its vendors are aware of these processes, there will likely be a reduction in attempted fraud as a result.