Detection and Prevention of Purchasing Fraud
Types of Purchasing and Vendor Fraud
Some common forms of purchasing and vendor fraud are listed below:
• Bribery and corruption (kickbacks, gifts and gratuities to company official and/or employees from contractors and vendors)
• Bid-splitting schemes
• Change order schemes (often involving the tailoring of job specs to a specific vendor, or using vague or general spec in the original bid, which allows for later fraudulent change orders)
• Improper awards to “sole source” vendors (who are not truly sole source)
• Improper use of “emergency” POs (where no real emergency exists)
• Improper use of Open/Blanket POs (to avoid required competitive bidding)
• Contract awards to the “too successful” vendor (an indicator of bribes/kickbacks)
• Improper use of company credit cards
• Improper use of “same day” payment requests (to circumvent regular invoice approval procedures)
Key Controls to Prevent Purchasing and Vendor Fraud
Noted below are some key controls for preventing purchasing and vendor fraud:
• Proper segregation of the functions of 1) issuing POs, 2) receiving goods or inspecting projects and 3) approving of invoices.
• Education of all purchasing employees on the statutes, regulations and company procedures governing purchasing and competitive bidding.
• Establishment of a Master Contractor and Vendor Listing that cannot be accessed or changed by persons processing POs and approving invoices. The company should also have in place an ongoing “vendor validation process” that reviews and verifies each vendor’s business name, W-9s, tax identification number, phone number, street address, bank account and personal contact names.
• Use of “data analytics” to identify false vendors, excessive contracts to one vendor, contracts in excess of budget, excessive change orders, etc. (Note: Next month’s WNDE newsletter will provide examples of how data analytics can be used as a tool to detect or prevent purchasing fraud.)