Procurement Fraud: Hitting Organisations Where it Hurts

Procurement is big business in Australia – there are sections of government devoted solely to procurement and large organisations have policies and procedures in place to regulate procurement practices. It’s a huge area of growth but in recent years it’s also been increasingly exposed to abuse by unscrupulous employees and operators looking to gain significant financial advantage by skewing procurement processes in their favour. Government departments and large organisations need to be aware of the risks of procurement, and how to improve internal processes to avoid procurement fraud.

Procurement fraud on the rise

In its 2015 survey Fighting Fraud in the Public Sector, accounting firm PwC found that procurement fraud is now one of the top five economic crimes with around 33% of Australian survey respondents having experienced procurement fraud in the past two years. In the same period, the survey also found that procurement fraud had doubled in the public sector. In government organisations, procurement is a major area of expenditure, which also explains why there has been such an increase in procurement fraud. Fraud is most commonly committed at the payments stage of the process, as well as at the vendor vetting and selection stage.

The survey identified some common ways in which procurement fraud can occur:

• Awarding contracts without a tender process or without following established policy.
• Contract terms that are too favourable to the contractor.
• Collusion between the employee and contractor for financial benefit.
• Creating a fake supplier to invoice the organisation even though no services have been rendered.

A case in point

Ipswich City Council has recently come under scrutiny for its procurement activities. The council, one of the largest local governments in Queensland, was subjected to an assessment by the auditor-general. There were 11 major issues occurring over the past six years, including:

• Significant increases in contract costs.
• Invoices being paid without documentary evidence that work had been finished.
• Overpayment of GST.
• Failure to comply with the council’s own procurement policy.

The council claims that it has improved its procurements processes since the findings were released.

Preventing procurement fraud

To prevent or minimise procurement fraud, there are a number of general precautions to take. Organisations should:

• Be alert to the early warning signs of fraud.
• Investigate any breaches of policy in a holistic manner.
• Ensure that minor policy breaches don’t develop into major corruption.

The PwC survey also gives very detailed suggestions about preventing procurement fraud at each major stage of the procurement process. Examples include:

• Procurement decision-making is centralised so that the decisions are not left up to unsupervised individuals.
• Selection criteria are confirmed and properly communicated before the tender process starts.
• The staff who order any goods are not the same staff who receive the goods.
• Staff are regularly trained to look for procurement fraud risks and warning signs.
• Invoices to be paid are matched to purchase orders.
• Proof of delivery is confirmed before payment of invoices.

The survey goes on to note that procurement fraud can be prevented or detected early if those working in procurement have a complete understanding of the “procurement framework and lifecycle.”

As evidence that this approach can work, the 2015 Procurement Australia Awards award for procurement excellence went to the council procurement officer for the City of Holdfast Bay in South Australia. Her achievement was an overhaul of the council’s procurement system, including a new purchasing culture. Results included increased compliance, improved service delivery and most importantly savings of up to 35% in procurement costs.

Procurement fraud has increased over the last few years, but it is clear that increased diligence, centralisation and knowledge of the procurement process can have enormous savings for government departments and large private sector organisations.