Updated: Aug 29
Training and education are crucial investments in procurement fraud risk mitigation. Empower your employees with the knowledge and skills to identify and report suspicious activities.
Information rules the world
Procurement fraud poses a significant threat to organizations worldwide, leading to financial losses, reputational damage, and operational disruptions. In response, businesses are compelled to adopt strategies that effectively combat this menace. Two predominant approaches have emerged: reactive and proactive response strategies. This article delves into the nuances of each strategy, analysing their strengths, weaknesses, and real-world applications.
Proactive versus a reactive response to fraud and corruption allegations, which would you choose? In trying to understand your corruption and associated procurement fraud risk, building a risk profile for your organisation including its insider threat is an important starting point to fighting fraud and corruption locally, throughout your organisation and its global supply chain.
If you in the planning phase of a risk assessment and are about to build a profile of your organisation procurement fraud and corruption risk, you should not only look at internal sources of information but also international assessment of risk that outline the current risks and themes that may impact your organisation. One such source is the Report to the Nations published by the Association of Certified Fraud Examiners.
The 2022 ACFE study covered 2110 cases from 133 countries with a total loss of more than $3.6 billion. The average loss per case is $1,783,000. A number of the key findings in this year’s report include:
Corruption continues to be the most common scheme in every global region and is the most common scheme across all sectors
42% of fraud schemes were detected by tip
Organisations with hotlines detected fraud more quickly and lower losses that those organisations without a hotline
Nearly half of cases occurred due to the lack of internal controls or overriding existing controls
Only 6% of perpetrators had a prior fraud conviction
85% of fraudsters presented behavioural red flags of fraud
Are these areas that you're currently considering or have introduced into your organisation risk assessment or detection methodology?
REACTIVE RESPONSE STRATEGY
The reactive response strategy primarily involves addressing procurement fraud after it has been detected. This approach relies on incident investigation, legal action, and remediation efforts to mitigate the damage caused by fraudulent activities. Key characteristics of the reactive strategy include:
Incident detection: Organisations usually become aware of procurement fraud through internal audits, whistleblower reports, or unexpected anomalies in financial data.
Investigation: Only when fraud is suspected, does an organizations initiate an investigations to collect evidence and understand the scope of the fraud.
Legal action: Once procurement fraud is confirmed an organisations may pursue legal action against the perpetrators. This could involve financial recovery through the contract, civil litigation or criminal prosecution.
Risk mitigation: After addressing the immediate concerns, organisations may implement corrective measures to prevent similar incidents in the future. This might include process redesign, enhanced internal controls, and employee training.
Timely detection of fraud is crucial for minimizing potential losses
PROACTIVE RESPONSE STRATEGY
The proactive response strategy focuses on preventing procurement fraud from occurring in the first place. It aims to identify vulnerabilities, implement safeguards, and foster a culture of integrity within the organization. Key elements of the proactive strategy include:
Risk assessment: Organisations conduct comprehensive risk assessments to identify potential vulnerabilities within their procurement lifecycle and counter fraud processes.
Data analytics and analysis: Use of data analysis or leveraging advanced technologies such as data analytics and artificial intelligence to monitor and identify patterns that might indicate procurement fraud or corruption.
Supplier due diligence: Implementing stringent due diligence measures when onboarding suppliers that includes verifying vendors counter fraud measures may help ensure that only trustworthy partners are engaged in business transactions and creates a strong counter fraud culture.
Training and awareness: Educating employees about procurement fraud risks, red flags, and reporting mechanisms creates a stronger counter fraud culture and becomes an integral part of the organization's defence against procurement fraud.
Having an awareness of common procurement fraud methodologies are a necessary part in the detection and mitigation of risk. The ACFE report highlights that the top 5 concealment methods used by fraudsters included;
39% created fraudulent physical documents
32% altered physical documents
28% created fraudulent electronic documents or files
25% altered electronic documents or files
23% destroyed or withheld physical documents
12% of cases did not involve any attempt to conceal the fraud
The significant value in control measures can't be underestimated, the ACFE research clearly highlights the importance of being able to collect your own data to detect and respond to fraud risk.
Although receiving tips is only one information source in building a risk profile, it is clearly a powerful tool. The findings also outline the common methodologies in which perpetrators commit fraud which highlights the importance of training operational staff on what to look for in behaviours and most importantly where control measures are overridden. When linked with staff that receives formal procurement fraud training, the insider threat is clearly identified quicker and financial losses reduced, where your organisation is a target of fraud.
PROACTIVE RESPONSE TO PROCUREMENT FRAUD RISK
So once you have a clearer picture of your risk, what is the next step? Do you introduce control measures that mitigate these identified risks and then sit back and wait to see if they work or do you continually measure their performance? Are your policies and procedures, systems and controls or expertise and capabilities sufficient to mitigate these risks?
To support this risk measurement do you introduce proactive detection techniques such as data analysis and/or audit to scrutinise the areas of risk, that will assist in understanding whether specific areas of your procurement lifecycle are a high, medium or low risk.
Do you recognise the value of data, the data sources that can be used to assess your risk and where to collect it, or how it can be used to drive your short, medium and long term approach to risk?
APPROACH STRENGTHS AND WEAKNESSES
Both a reactive and proactive approach have both strengths and weaknesses. In considering which approach you will take.
Both approaches allow for a swift response in addressing procurement fraud.
Both approaches allow for financial recovery through the contract, civil recovery and/or criminal action.
A proactive approach will detect increased levels of procurement fraud and so ensure a decrease in the level of financial losses.
Proactive strategies focus on preventing procurement fraud before it occurs, saving additional losses and greater preservation of reputation.
Effective preventive measures can enhance counter fraud culture, establish a strong defence against procurement fraud, making the organisation more resilient.
Proactive measures are by their nature more resource intensive, where, introducing proactive measures may require substantial investments in technology, training, and process redesign.
In the battle against procurement fraud, organisations face a choice between reactive and proactive response strategies. While both approaches have their merits and limitations, a balanced strategy that combines elements from both sides might be the most effective solution. Swift and efficient detection of ongoing fraud followed by proactive measures to prevent its recurrence can provide organisations with the best chance to safeguard their financial interests and reputations in an increasingly complex business landscape.
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