Purchasing and procurement fraud

DOIhttps://doi.org/10.1108/eb025658
Publication Date01 Jan 1995
Pages322-330
AuthorDavid Davies
SubjectAccounting & finance
Purchasing and procurement fraud
David Davies
Received: 30th November, 1994
Journal
of
Financial
Crime
Volume
2
Number
4
David Davies is a Senior Manager in KPMG
Forensic Accounting, London. David's experi-
ence includes fraud investigation work for cor-
porate clients and for regulators, the preparation
of expert evidence in connection with major
commercial disputes and fraud awareness train-
ing and advice on fraud risk management for
corporates and regulators internationally. David
is co-author, with Ian Huntington, Head of Fraud
Investigation at KPMG, of 'Fraud Watch: A Guide
for Business', which was published in December
1994 by Accountancy Books.
ABSTRACT
Purchasing
and procurement fraud is a large
area
of fraudulent
activity.
It
is one
of the
most
prevalent types of fraud affecting British
industry
today.
This paper
highlights
the key
risks
of fraud in the
purchasing
and
procure-
ment
area
and the warning signs.
INTRODUCTION
One of the questions often asked of
companies is: 'How would you know if
you had been defrauded?' A typical
response is: 'We'd see the loss a stock
loss,
a hit on the bank statements, a loan
which defaults in unusual circum-
stances', or 'We'd see a variance against
budget'. But are companies likely to see
'the loss' in purchasing and procurement
fraud?
The classic type of procurement fraud
is,
for example, when a manager or
employee in a company provides confi-
dential information to a bidder for a
lucrative contract in return for some
kind of kickback to the employee
per-
haps information relating to the techni-
cal criteria on which bids are being
assessed or the prices of other bids. The
'loss'
in this type of fraud is the differ-
ence between the price paid to the sup-
plier and the price which the company
would have paid if the confidential
information had not been leaked. In
these circumstances it may be very diffi-
cult to see 'the loss'.
Another example is dummy supplier
frauds. Typically a fictitious supplier is
set up by a corrupt purchasing manager
and over time a large number of rela-
tively small payments are made to the
supplier. This type of activity is often
referred to as 'salami fraud'. Each pay-
ment is small, like taking a thin slice of
salami, but over time the cumulative
effect of the fraud is considerable. Once
again it may be very difficult to see 'the
loss'.
It will not necessarily show up in
the variances. This type of fraud is
usually built into the cost base.
Purchasing and procurement fraud is
an invisible fraud. The frauds often go
undetected for years. This makes it
especially important to be sensitised to
the risks and to be alert to the early
warning signs.
Two further problems arise in rela-
tion to this type of fraud. First, many
businesses focus only on the more
specialist risks in their business. This is a
particular problem in the financial
sector. For example, banks may be alert
to the specialised risks relating to bank-
ing business but may focus less well on
the general types of fraud which may
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