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Procurement Fraud Risk Assessment: Examine the Scale of the Underlying Risk

Why don't government, public sector, and private sector projects introduce anti-fraud and corruption risk assessments at the project planning stage? What would be the reduction in the percentage of project financial losses if this was common practice?

It does not do to leave a live dragon out of your calculations, if you live near one.” – J.R.R. Tolkien


Once you understand 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 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 would also 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 we understand the various typologies the next step is to look at the procurement lifecycle and how it can be affected, when we look at 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 adhoc and emergency works, variations and change orders, contract and project management, work sign off and asset management

When we consider the various typologies of fraud and the stages and areas of the procurement lifecycle we start to get a picture of the potential for fraud and whether our controls are adequate.


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 we 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 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 and that it has been highlighted in cases globally that projects at the beginning have been designed to fail so that monies can be illicitly diverted.


Additional areas of procurement fraud are committed through manipulation and billing for areas such as time, quality, quantities and resources that ultimately affect price and the increase in profit for the contractor. 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.


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 you may want to consider in 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 we recognise roles within each stage of procurement and projects and the opportunity or potential for fraud, can we design how we are going to protect organisation revenues and the integrity of the procurement process.


So when we now consider the typologies, procurement lifecycle, project management and individuals that can influence procurement and project processes there is the potential for hundreds of areas of risk. Now that we have briefly considered these risk areas we get to understand the potential for significant financial loss and the importance of a fraud risk assessment at the planning stage of a project.


So why do government, public sector and private sector projects not introduce anti-fraud risk assessment within projects?



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