Procurement process: best practices to prevent purchasing frauds

A weak procurement process gives frauds opportunities to buyers and suppliers: overcharge, fictitious services, conflict of interest… At the end, the company is paying the cost of these fraudulent agreements. Solvest presents some best practices to prevent the fraud risks linked to the purchasing processes.

A fraudulent agreement between a company’s purchaser and a supplier implies a cost for the company. For the buyer, the motivation is to get a financial benefit or to help a relative. For the supplier, the fraud is a way to obtain the sales order or to increase its margins. Here are some examples of purchasing frauds:

• purchase price higher than the market price
• fictitious or partially realized service
• invoiced quantities higher than actually delivered
• preference given to a provider closely linked to the buyer or his relatives

In any case, the cost of the fraud is charged to the buying company, which is overpaying the products or services and doesn’t take advantage of the competition between suppliers.

The following best practices help the companies to prevent and detect these risks of fraud.

A fraudulent arrangement between a buyer and a supplier often leads to overcharging the company. In order to avoid this risk, it is recommended to introduce, in the procurement processes, the necessity for the buyer to consult several suppliers and get more than a single quotation. For the purchase of common goods or services, which can be provided by several vendors, a minimum number of quotes may be defined (for example at least 3 quotes).

The competition between suppliers helps to avoid the fraud opportunities and to detect atypical purchases by comparing the offers.

As for other processes in the business organization (payments, sales, payroll, etc.), it is important to segregate the duties in the procurement process. The following roles especially have to be assigned to different people:

• purchase requester: he specifies the purchase needs (specifications, quantities), and he is the purchase beneficiary;
• buyer/purchaser: he requests the suppliers quotes and selects the best one on a financial aspect and answering the requester needs;
• warehouse administrator/manager: he receives the goods delivered and makes sure that the received and invoiced quantities are in line.

The segregation of duties is necessary to avoid purchasing fictitious services, goods not delivered or not required by the business operations.

The information system of the company should ensure a strong traceability of the procurement processes, in order to identify the users who have done the purchase request, the purchase order and the receipt of the materials. All the price quotes received should be kept for any further need.

Some indicators must be implemented in order to control the procurement process. These KPIs can help the controller to find out an abnormal position of a specific supplier or an atypical evolution of the purchasing flows. Depending on the business size, the analysis can be done by the audit or controlling department, or even by the top management in smaller businesses. Some indicators to measure and control are the following:

• the “market share” of each supplier within its products family: a supplier having a very high market share for a type of product for which the competition should be strong is a warning flag
• the evolution of the amount ordered by supplier, to be analyzed together with the staff changes within the purchasing department
• the unit prices evolution
• analysis of the amount by purchase order: to compare with the authorizations and limits
• the existence of recurring purchases, with a flat amount: possibly a fictitious service

To avoid any conflict of interest between a buyer and a supplier, it is recommended to realize due diligence of the company’s suppliers. This includes a risk analysis by identifying the vendor’s shareholders and managers, the related companies, or its legal history. The due diligence will help to find out possible links between the buyer or his relatives and the supplier.

The due diligence is part of the 8 measures of the French Law “Sapin 2” which apply to the French companies with 500 or more employees and with a turnover higher than 100 millions euros. It is however also recommended to the smaller companies to implement similar processes.

In a previous article, we have mentioned the importance for the companies to implement whistleblowing tools. It is also an obligation of the law “Sapin 2”, which is extended to all the French companies with 50 or more employees.

Having a whistleblowing process allows the employees to inform the company about any case of fraud, including the purchasing frauds. If it is available for the company’s customers and suppliers, the tool may also be used by a prejudiced supplier facing an unfair competition. Last but not least, it is also an effective deterrent against the potential fraudsters.

The purchasing frauds can be avoided by applying strong processes (segragation of duties, traceability, number of quotes, whistleblowing) and controls (KPI’s analysis, due diligence).

Solvest supports companies in implementing the processes and controls against the fraud risks in the procurement process. Have a look to the scope of our corporate investigations or contact us for further information.