Procurement Fraud: be Cautious of These 4 Fraud Red Flags

07Aug7 August 2020

Procurement Fraud: be Cautious of These 4 Fraud Red Flags

Recent research from the tax and audit consulting firm, Crowe UK together with the Center for Counter Fraud Studies (CCFS) of the University of Portsmouth revealed in the 2018 Financial Cost of Fraud report that mining companies contributed 51% of losses to procurement fraud. Meanwhile, procurement fraud in the UK is estimated to cost billions of pounds every year.

Procurement fraud is a type of fraud that occurs in the procurement of goods in private companies and government institutions. This type of fraud occurs very often and is not easy to detect, prove or prosecute to court because of the many parties involved, especially internal parties, and can occur at various stages of the procurement life cycle. Procurement fraud is the most difficult type of fraud to be eradicated. Based on the Indonesia Corruption Watch’s (ICW) report, 70% of corruption cases in Indonesia originate from the purchase of goods and services.

The red flags

Every fraud, including procurement fraud, always shows certain suspicious behaviors or red flags. By recognizing these red flags, we can be more alert to the indications of fraud so that it can be prevented, and company losses can be minimized. The following are red flags that may occur in procurement fraud:

There are suspicious bids such as limited competition, cases where the winning bidder shares the work with other bidders who lost or did not even follow bids, bids that match only one bidder, or all bids are made by the same contractor. These flags indicate that there has been a manipulation of the contract or bid value and also suggests that the price was set before the commencement of bidding.
To benefit certain suppliers, the company violates the agreements that have been made by changing the needs or time of the contract at any time, performing contractual breakdowns, and procuring from many suppliers for the same goods / services.
Giving an unnecessary prize to a bidder who wins the bid.
A conflict of interest as evidenced by a close relationship between the contractor or company and the bidder.
And much more.

Efforts to prevent fraud

Prevention is always better than a cure. Although this type of fraud is the most complex to eradicate and may not be completely eradicated, this fraud can be minimized by implementing appropriate preventive actions, such as implementing internal company controls to evaluate management, creating complaint channels so that any red flags can be reported, and selecting employees and vendors by conducting due diligence before conducting procurement.

Integrity Indonesia as a company engaged in compliance for more than fifteen years has been trusted by clients to provide services to mitigate fraud, including employment background screening, whistleblowing system, due diligence, and fraud investigation. Protect your company from fraud, contact us for more information on other compliance services.