Why isn't counter procurement fraud and corruption risk assessments introduced at the project planning stage? What would be the reduction in the percentage of project financial losses or project failure if this was common practice?
The cost of preventing procurement fraud is a fraction of the price you pay for not preventing it. Invest wisely.
FRAUD RISK WITHIN PROJECTS
In a large percentage of cases project costs bear no resemblance to the original contract values. If fraud risk isn't considered at the planning stage how do individuals determine how much of the increased costs is due to fraud and corruption.
One of the issues within projects is that in the majority of cases there is no risk assessment for procurement fraud or corruption and as such invariably no consideration is made for fraud controls and procurement fraud risk mitigation. An assessment of fraud at best is conducted through an audit at the end of a project where a large percentage of the fraud and corruption is hidden and so is never discovered. It is one of the reasons why the value of fraud can be significant within projects and that it has been highlighted in many cases globally that projects have been designed to fail so that monies can be illicitly diverted.
Due to the scale of procurement, limited controls and the significant values involved, projects become very attractive for fraud and the illicit diversion of funds. Procurement fraud can be diverse in nature within projects and committed through manipulation of billing for areas such as time, quality, quantities and resources that ultimately affect price and the increase in profit for the contractor.
TYPOLOGIES OF PROCUREMENT FRAUD
All typologies of procurement fraud can be used within a project, however, the common fraud methods used are likely to be the manipulation of quality, quantities, time and resources. In these areas there is a need for accurate monitoring and verification of completion, if this isn't done, then it leaves a project open to significant fraud risk and losses. The methods in these areas might include:
Quality of materials can be manipulated through the introduction of inferior, substituted or counterfeit products.
Inflating the billing for the quantities of materials and/or personnel used on a project.
Increasing the hours that individuals worked on a project or increasing rates for individuals working late or at weekends.
Invoicing for the increased number of resources working each day and/or materials used.
RISK ASSESSMENT
Understanding the scope of procurement fraud risk, from the insider threat to the collusion between staff and suppliers and the diverse nature of an external threat that might include bid rigging or the targeting of payment systems by organised criminals, mapping where an organisation can be targeted, is a good starting point in recognising the level of procurement fraud risk or opportunity that will assist in the design of a framework to mitigate identified risk.
Procurement fraud risk mitigation is not a luxury; it's an essential investment to protect your organization's reputation and integrity.
PROCUREMENT FRAUD MITIGATION
To assess organisation risk recognising the breadth of procurement fraud, its typologies and the methods in which they can be committed is a valuable exercise. The British Standard BS10501: Guide to Implementing Procurement Fraud Controls outlines the scope of fraud and areas to consider when introducing or reviewing procurement fraud controls.
The breadth of typologies and methodologies of procurement fraud can be significant. As an example false invoicing might include inflated or fictitious claims and mischarging so the risks within the billing process can be more significant particularly where the methods of fraud are not understood.
PROCUREMENT LIFECLYCLE
Once the risk is understood from the various typologies the next step is to look at the procurement lifecycle and how it can be affected, when an assessment is conducted of the pre award and post award stages of procurement there are many areas that can be impacted by procurement fraud:
The pre award stages can include identification of need and justification, design and specification, budget, route of procurement, vendor identification and prequalification, bid response, tender matrix and selection
The post award areas of risk within contract management can include ad-hoc and emergency works, variations and change orders, contract and project management, work sign off and asset management
When consideration is given to the various typologies of fraud and the stages and areas of the procurement lifecycle, a picture can be created of the potential for fraud. The next step is assessing whether the systems and control measures, policies and procedures and expertise and capabilities in place are adequate.
INFLUENCE OF PROCUREMENT AND PROJECT PROCESSES
The final area for consideration in understanding the level of risk is people and their influence on the procurement and project processes, both the insider and external threat. Areas that should be considered within the assessment of risk and manipulation or influence or procurement or project processes might include decision making, project management, change management and back office roles from sign off of works or payment. From the initial identification of need and project design, to the significant levels of asset management through to the completion of a project there are a significant number of areas where procurement fraud can occur.
Only when roles are identified within each stage of procurement and project lifecycle and the opportunity or potential for fraud, can a risk mitigation design be created on how organisation revenues are protected through the integrity in the procurement process.
STRATEGIES FOR PROCUREMENT FRAUD RISK MITIGATION
Mitigating procurement fraud within projects is a multifaceted endeavour that requires proactive measures, strong ethical values and continuous vigilance. By implementing transparent processes, robust internal control measures and creating a culture of accountability, project managers and operational staff can significantly reduce the likelihood of procurement fraud.
Transparent procurement processes: Implement clear and transparent procurement processes that outline the steps from vendor selection to contract award. This reduces the opportunity for manipulation and fosters competition and fairness.
Robust vendor screening: Carefully vet and screen potential vendors before inviting bids. This includes assessing their financial stability, reputation and past performance. Reliable vendors are less likely to engage in fraudulent activities.
Competitive bidding: Encourage competitive bidding by inviting multiple vendors to submit proposals. This helps prevent bid rigging and ensures that projects receive the best value for money.
Strong contractual agreements: Draft contracts that include anti-fraud clauses, ethical standard, consequences and sanctions for non-compliance. Clearly define deliverables, pricing and payment terms to reduce ambiguity that can be exploited.
Vetting sub-contractors: Introducing a contract term that ensures that all sub-contractors and/or consultants not highlighted within the contractual agreement are vetted to ensure that they do not create a bid rigging or bribery risk.
Compliance team: Consistent approach to the verification that goods, works and services have been provided in the right quality and quantities at the right price and time and at the correct location.
Independent audits: Conduct regular independent audits of the procurement process and invoicing to identify irregularities on inconsistencies. Audits provide an objective assessment of compliance and fraud risk.
Supplier relationship management. Nurture positive and transparent relationships with suppliers. This makes it more difficult for fraudsters to exploit gaps between partis and encourages reporting of suspicious activities. A supplier can also be introduced into a counter fraud approach and culture to create an environment of risk identification.
Internal control measures: Establish strict internal controls that clearly define roles and responsibilities within procurement, quality assurance, finance and asset management. Segregation of duties and dual controls ensures that no single individual has control over all stages of the procurement lifecycle.
Whistleblower mechanisms: Implement mechanisms for employees, suppliers and other stakeholders to report suspicious activities in confidence and anonymously, where applicable. Whistleblower protection can encourage reporting of fraud without fear of retaliation.
Training and awareness: Training employees involved in projects and procurement on fraud risks, detection methods and prevention techniques. Reporting procedures and counter fraud policies and approach should also be covered. An informed team is better equipped to recognise and mitigate fraudulent activities.
As projects grow in complexity, so do the risks involved, therefore, an ongoing commitment to fraud prevention is essential to safeguard project success and organisational integrity.
When the typologies, procurement lifecycle, project management, decision making, change management and individuals that can influence procurement and project processes are considered, there is the potential for hundreds of areas of procurement fraud risk. Now that a brief consideration has been given to these risk areas, there is a better understanding of the potential for significant financial loss and the importance of a fraud risk assessment at the planning stage of a project.
So why don't government, public sector and private sector projects introduce anti-fraud risk assessment within projects?
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