IN 2018, Association of Certified Fraud Examiner
(ACFE) published a global report on occupational
fraud, based on analysis of 2690 cases in 23 industries of 125 countries. The cumulative loss born by victim firms is about seven billion US dollar. In 2009, the Office of Fair Trading (OFT) imposed mulct amounting to £129m on 103 construction firms incriminated in ‘cover pricing’ in the United Kingdom. These firms were accused of collusion with competitors for agreeing on ‘over-inflated’ bids for construction contracts within and amongst other organizations, the NHS and schools. An Engineer in an NHS Trust UK colluded with a supplier to submit bogus orders of £80,000 for equipment, supposedly for Trust use. In return for procuring the items under false pretences, that Engineer received items from the supplier for personal use. Procurement of goods, works and other services by public bodies alone amounts on average to between 15% and 30% of GDP and in some countries, it is even more than the above-mentioned percentage. In case of huge spending, transparency of the processes is limited, and manipulation is hard to detect, thus damages from procurement fraud are estimated at normally between 10% to 25% and in some cases as high as 40 to 50%, of the contract value. Susceptibility towards procurement risks manifolds due to bribes, offered to top management usually in a handsome amount to get favourable decisions. Cartel is another factor, where bidders formulate collusion to manipulate the award decision in favour of one of the members of their group.
In addition to the inherent fraud risks and manifestations within the procurement cycle, urgent purchases often grow unrestrained at the end of the fiscal year to spend the unspent money, therefore urgency creates the high possibility of procurement risk. It is a widespread perception that procurement is always at risk during the disaster, humanitarian organizations face million dollars of loss due to corruption in an emergency situation especially during logistics support services. Procurement risks also thrive in obscurity. Wherever there is less visibility to desired information, there will be always greater vulnerability of fraud, corruption and getting less to the value of money. Risk in the post-contract award phase focuses on contract management, specifically on payments made on contracts, notable examples involved overpayments to suppliers through the fraudulent submission of duplicate or false invoices or ‘kickbacks’ in the process.
Several researchers put their efforts to bracket the various variables stimulating the procurement risk. The one of widely accepted model is the fraud triangle, devised in 1953 by Donald Cressey, a criminologist and researcher. Each leg of the triangle represents non-sharable financial need, opportunity and rationalization respectively. Cressey argues that financial pressures turn trusted employees into violator. Available opportunity is the second leg and renationalization enables the perpetrator to maintain his concept of himself as a trusted person. According to theory, the financial pressure itself will not lead for committing the fraud but instead, all three legs must be there at the same time for violating the trust. Cressey fraud triangle indicated the particular characteristic that increases the likelihood of fraud occurrence but lacks perfect guidance. Albrecht introduced the fraud scale in 1984 to minimize procurement fraud.
Albrecht believed that fraud is difficult to predict because a reliable profile of occupational fraud perpetrators does not exist. They assessed by evaluating the relative forces of pressure, opportunity and personal integrity. Pressure and opportunity are both components of the fraud triangle, but the fraud scale substitutes personal integrity for rationalization. The fraud scale is particularly applicable to financial statement fraud, in which sources of pressure (e.g., analysts’ forecasts, management’s earnings guidance and a history of sales and earnings growth) are more observable. Another model called fraud diamond, Wolfe and Hermanson presented this model which points out the both personality traits and capability to commit the fraud. According to them, an opportunity opens the doorway, incentives (Pressures) and renationalization to drag the people toward it, but still, a person can’t commit the fraud if he or she has not capability to do so.
Different interventions may prove to be good remedies for coping with procurement risk, the famous tool is to spend and recover, where previous years accounts are audited to recover the overspendings. In 2009, the Home office in the UK implemented this strategy and recovered four million ponds as overpayments. Procurement training and subsequent refreshals can play a significant role to minimize the monetary and non-monetary risks at both pre & post stages. US procurement fraud task force established 36,000 trained procurement specialists, auditors and prosecutors to control the risk. Local organizations can collaborate with PPRA for risk mitigation trainings to reduce the procurement risk at their respective levels. Chartered Institute of Purchasing and Supply (CIPS) is another world recognized institution famous in supply chain expertise. It offers training and certification for procurement specialists to improve their skills. Collaboration between CIPS and local organizations may produce tremendous results by applying procurement risk mitigation techniques at each layer. Apart from all other factors, transparency is a crucial element, hence federal and all provincial governments must publish their spending for reviews. It is the responsibility of the public, experts and civil society to act as ear and eyes of institutions for pointing the malfunctioning. Phenomena of data analytics and support to in-house whistle-blowers can play a vital role to overcome the procurement risks.
—The writer is currently working in Eighteen (Saif Group.
IN 2018, Association of Certified Fraud Examiner