Procurement Fraud and Fraud Management

Procurement and Audit notes revision

Fraud refers to the intentional misrepresentation of financial information by one or more individuals amongst management, employees and third parties.
Fraud involves: –
– Manipulation, falsification or alteration of records or documents. For example, where an employee alters the amount payable to a supplier as per the invoice with the objective of obtaining a financial gain.
– Misappropriation of assets. For example, where cash collections are misappropriated and the amount is not recorded.
– Suppression/omission of the effects of transactions from records/documents. For example, failure to recognise liabilities in the accounting records.
– Recording and transactions without substance.
– Misappropriation of acting policies.
– Reporting to management where any frauds have been detected or suspected.

– Providing recommendations through the management letter on ways of strengthening the system to minimise the potential frauds.

Procurement Fraud’ or ‘Fraudulent Procurement’
International Anti-Corruption Resource Centre (IACRC) defines procurement fraud as any fraud relating to company procurement goods, works, services or commissioning construction projects from third parties. Accordingly, fraud can happen when the tender process has not been followed so that fraud can be committed, or when there is bid rigging. It can also happen when there are payment claims for goods or services that were not delivered or were inferior to what was specified in the order.
Types of Procurement Frauds
International Anti-Corruption Resource Centre (IACRC) has listed the following as types of procurement frauds.
Bribes and Kickbacks
A bribe is usually defined as the giving or receiving of a “thing of value” to corruptly influence the actions of another, most commonly to influence a contract award or the execution of a contract. A “kickback” is a bribe paid by the contractor after it is paid. Most bribes in exchange for large contract awards in international development projects are paid as kickbacks, usually 5%-20% of the contract value.
Corrupt payments
The bribe need not be in money or cash, and often is not. Any benefit given or received in the name “Things of value” that have been given and received as bribes include:
• Expensive gifts, free travel and lavish entertainment
• “Loans,” whether or not repaid
• Use of credit cards
• Sexual favours (hiring of prostitutes, etc.)
• Overpaying for purchases, e.g., paying Kshs.2000,000 for a car worth Kshs.1000,000
• Cash
• Fees and commissions, even if recipient allegedly provided services to the payer
• Hidden interests in business transactions
Often the payments follow the general sequence outlined above, with the amount and form of payments becoming more significant and incriminating as the scheme progresses.

Corrupt influence
• Corrupt influence often is reflected as, among other things:
• Qualifying an unqualified or untested company to bid or be a vendor
• Improper or non-competitive contract awards
• Paying too much for goods or services
• Buying too much of an item, or buying inappropriate items
• Continued acceptance of low quality or non-compliant goods or services As the corruption continues, the abuses often turn into fraud, such as fictitious invoices, with the parties conspiring to split the profits. Eventually the excesses of the scheme lead to its detection, as the mounting evidence of favourable treatment and fraud, and the conspicuous expenditures of the conspirators, call attention to their behaviour.
The major red flags of bribes and kickbacks
• Improper (e.g., non-competitive) selection of a contractor Unjustified favouritism of a certain contractor, e.g. approval of high prices, excessive purchases, continued acceptance of low quality goods, etc.
• Unnecessary broker or middleman involved in transactions
• Procurement official accepts inappropriate gifts and entertainment
• Unexplained increase in wealth by procurement official.

Collusive Bidding by Contractors
Groups of bidders might secretly agree to submit complementary high bids to allow pre-selected contractors to win contracts on a rotating basis, or to divide contracts by territory. Collusive bidding, also known as “bid rigging” will drive up prices in the affected industry. It is most common in industries with high start-up and entry costs and relatively few bidders. Some form of bid rigging often accompanies kickback schemes in order to insure that the corrupt company is selected.

The major red flags of collusive bidding
• Winning bid too high compared to cost estimates, published price lists, similar jobs or industry averages; persistent high prices over time
• Rotation of winning bidders by job, type of work or geographical area
• Losing bidders hired as subcontractors
• Unusual bid patterns. For example, the bids are:
• Too high
• Too close
• Too consistent

• Too far apart
• Round numbers
• Incomplete Identical or similar to prior or other bid
Apparent connections between bidders: common addresses, personnel, phone numbers, etc.
 Change Order Abuse
A contractor, in collusion with procurement official, can submit a low bid to insure winning a contract, and then increase its price and profits by submitting change order requests after the contract is awarded.
A dishonest contractor, acting alone or in collusion with contract personnel, can submit unjustified or inflated change order requests to increase profits, or, as the result of corruption, use the change order process to extend a contract that should be re-bid.
The major red flags of change order abuse:
• Weak controls and lax procedures regarding review of need for change orders
• Numerous, unusual or unexplained change orders for a specific contractor approved by same employee
• Pattern of low bid award followed by change orders that increase the price or scope of the contract, or extend the contract period
• Vague contract specifications followed by change orders
• Incomplete or “preliminary” specifications subject to change based on later
engineering studies, etc.
Co-mingling of contracts
Dishonest contractors can submit multiple bills on different contracts or work orders for work performed or expense incurred only once. A contracting official can facilitate the scheme and share in the profits by writing similar work orders under different contracts and accepting the multiple billings.
The major red flags of co-mingling of contracts:
• The contractor submits several billings for the same or similar expenses or work under different jobs or contracts
• The contractor submits the same or similar documentation to support billings on different contracts
• Multiple awards for similar work are given to the same contractor
• Similar work orders are issued to the same contractor under more than one contract
Conflict of interest
Conflicts of interest can arise if procurement personnel have undisclosed interests in a supplier or contractor, accept inappropriate gifts, favours or kickbacks from vendors, or engage in unapproved employment discussions with current or prospective contractors or suppliers. Kickbacks can be prosecuted as a conflict of interest, as well as bribery. A conflict of interest case might be easier, as the prosecution need show only that the kickbacks, which can be in the form of gifts and favours, were not disclosed, rather than having to prove corrupt intent.
The major red flags of conflict of interest
• Unexplained or unusual favouritism of particular contractor or vendor
• Contracting or purchasing employee lives beyond means
• Employee has discussions about employment with current or prospective vendor
• Close socialization with and acceptance of inappropriate gifts, travel or entertainment from a vendor
• Procurement employee appears to conduct side business
Excluding qualified bidders
A dishonest procurement employee, probably in collusion with a corrupt bidder, can use a variety of tactics to exclude other qualified bidders, including arranging narrow or unduly burdensome pre-qualification criteria, establishing unreasonable bid specifications, splitting purchases to avoid competitive bidding, making unjustified sole source awards, and so on.
The major red flags of excluding qualified bidders
• A significant number of qualified bidders fail to bid
• Unreasonably narrow contract specifications
• Allowing an unreasonably short time limit to bid
• Adopting unreasonable “pre-qualification” procedures
• The failure to adequately publicize requests for bids, e.g., using only local publications, or failing to publicize the request for bids
Failure to meet contract specifications
A contractor that knowingly delivers works, goods or services that do not meet contract specifications may be guilty of fraud if it falsely represents that it has complied with the contract or deliberately conceals its failure to do so. If it has not made fraudulent representations or concealed its acts, the contractor would be liable for breach of contract rather than fraud.
The major red flags of failure to meet contract specifications
• Discrepancies between test and inspection results and contract claims and specifications
• Failed tests or inspections
• Low quality, poor performance and high volume of complaints
• Early failure or high repair rates
False, inflated or duplicate invoices

Suppliers or contractors can intentionally submit false (meaning that no services were provided), duplicate or inflated invoices. The scheme can involve a contractor acting alone or in collusion with an employee of the victim organization who shares in the profits.
The major red flags of false, inflated or duplicate invoices General red flags
• Weak or un-enforced controls in the receipt of goods and payment of invoices
• Inadequate, copied or apparently altered supporting documents
Red flags of false invoices
• Invoiced goods or services cannot be located in inventory or accounted for
• No receiving report for invoiced goods or services
• Questionable or no purchase order for invoiced goods or services
• Red flags of inflated invoices
• Invoice prices, amounts, item descriptions or terms exceed or do not match:
• Contract terms
• Purchase order
• Receiving records
• Inventory or usage records
Discrepancies between invoice and supporting documents.
Red flags of duplicate invoices
Multiple invoices:
• In the same or similar amount to the same or related vendors
• On the same invoice or purchase order
• For the same or similar goods or services Multiple invoices with the same:
• Description of goods or services
• Amount
• Invoice number
• Purchase order number
Total payments to vendor exceed total purchase order or contract amounts
False statements and claims
Contractors or suppliers can submit false information about their employee credentials and experience, invoice for goods and services that are not delivered, charge for higher quality items than are provided, submit false or defective bonds, or make a variety of other false statements and claims.
The major red flags of false statements and claims
• Discrepancies between reported facts and test and inspection results
• Refusal or inability to provide supporting documentation

• Inadequate or apparently altered supporting documentation
• High rate of rejections, returns or failures
• Complaints from users
Imprest fund abuse
Replenished “imprest funds” (also known as “operating accounts” or “petty cash funds”) can be embezzled or used improperly by contractor employees. The employees might submit false or inflated requests for reimbursement of expenses, use the fund for personal or unauthorized expenditures, or “double- dip” by submitting reimbursement both to the fund and accounts payable.
The major red flags of imprest fund abuse
• No oversight or weak controls on disbursements and reimbursements
• Lack of supporting documentation; altered or copied documentation
• Endorsement on check differs from payee; unusual or second endorsement
• Disbursement of same or similar amounts to same person from both imprest fund accounts and accounts payable
• Use of imprest accounts for unauthorized purposes, “loans” or in amounts in excess of those permitted
Leaking of bid information
Procurement personnel can leak bid information from other bidders, or confidential pre-bid information, to a favoured bidder to give it an unfair advantage in the bidding process. Such schemes usually occur as the result of corruption.
The major red flags of leaking of bid information
• Poor controls on bidding procedures, e.g., failure to enforce deadlines, non-public opening of bids, etc.
• Winning bid just under the next lowest bid
• Acceptance of late bids
• Bid due date extended unnecessarily
• Late bidder is the low bidder
Manipulation of bids
A procurement employee, probably as the result of corruption, can manipulate the bidding process in a number of ways to benefit a favoured contractor or supplier. These include leaking information regarding competing bids, accepting late bids, changing bids, re-bidding work and so on. A contractor can also submit a “low” bid with the understanding that the corrupt procurement official will approve later contract amendments and price increases. The major red flags of manipulation of bids
• Poor controls and inadequate bidding procedures

• Winning bid voided for “errors” in contract specifications and the job is re- bid
• Acceptance of late bids
• Bids are “lost”
• A qualified bidder disqualified for questionable reasons
Fictitious vendor
In a weakly controlled environment, an employee with procurement responsibilities, or in accounts payable, or an outsider, can submit bills from a non-existent vendor. Normally fictitious vendors claim to provide services or consumables, rather than goods or works that can be verified. Dishonest bidders also can submit “bids” from fictitious bidders as part of bid rigging schemes.
Phantom vending schemes occur more often than thought, and can be detected relatively easily through automated proactive fraud detection programs.
The major red flags of fictitious vendor
• Weak controls: same employee can order, receive and approve payment for goods or services
• Paid vendors not on the approved vendor list
• Vendors not listed in business or telephone directories.
• Invoiced goods or services cannot be located or verified.
• Vendor address is mail drop
Product substitution
A supplier or contractor can substitute products or materials of lesser quality than specified in the contract, or use counterfeit, defective or used parts, in order to increase profits or comply with contract terms.
The dishonest supplier might give gifts or favours to inspectors or pay kickbacks to contracting officials to facilitate the scheme, and will submit false documentation to conceal it.
The major red flags of product substitution
• Unusual or generic packaging
• Discrepancy between product’s description or normal appearance and
actual appearance (e.g., “new” product appears to be used)
• Product identification numbers differ from published or catalogue numbers or numbering system
• Above average number of test or operation failures, early replacements, or high maintenance and repair costs.
 Purchases for personal use or resale
An employee can purchase items through his agency or company that are intended for his personal use, such as tools, personal computers, or automobile parts, or that the employee intends to resell as part of a side business, such as computer parts or inventory.
The major red flags of purchases for personal use or resale
• High volume or unusual purchases of “consumer items” or items suitable
for personal use or resale
• Business purchases from vendors that sell consumer products
• Purchased items “returned” to vendor without vendor credit or refund
• Purchased items to be drop shipped or delivered to another location
• Suspect employee conducts an outside business

Rigged specifications
An employee with procurement responsibilities, probably in collusion with a supplier or contractor, drafts a request for bids or proposals that contain specifications that are either too narrow or too broad.
Unduly narrow specifications allow only a favoured contractor to qualify, and unduly broad specs can be used to qualify an otherwise unqualified contractor to bid. Broad specs can also be used in connection with later contract amendments and change orders to facilitate a corruption scheme.
The major red flags of rigged specifications
• Only one or a few bidders respond to request for bids
• Similarity between specifications and winning contractor’s product or
• Specifications are significantly narrower or broader than similar previous requests for bids
• Purchaser uses brand name in request for bids
• High number of competitive or sole source awards to one supplier
 Split purchases
A single procurement can be split into two or more purchase orders or contracts, each below upper level review or competitive bidding thresholds, to avoid review or competitive selection. Repetition of this scheme, favouring the same parties, can be a strong indicator of corruption.
The major red flags of split purchases
• Two or more similar procurements from the same supplier in amounts just under competitive bidding or upper level review limits
• Unjustified separation of purchases, e.g. separate contracts for labour and materials, each of which is below competitive bidding limits, but when combined is over such limits
• Sequential purchase orders or invoices under upper level review or competitive bidding limits

• Contracts under the competitive bid limit followed by change orders that increase amounts of the contract
Unbalanced bidding
“Unbalanced bidding” includes a number of schemes in which bidders manipulate line item bid prices in order to gain an advantage in the bidding process. The schemes include:
• Quoting high prices on line items that the contractor knows or anticipates will be the subject of change orders increasing the quantity of goods or works required. For example, a road project might quote an exceptionally high price each of for 100 safety barriers, knowing that the number to be procured will later, after the contract award, be increased to 1000. The bidder might be informed of the proposed change as the result of a corrupt relationship with project officials.
• Quoting dramatically lower prices on line items that the bidder knows – perhaps by being tipped off as the result of bribes to project officials – will not be called for after contract award. This information allows the favored bidder to drastically lower its price on the unneeded items to defeat its uninformed competitors.
The major red flags of unbalanced bidding
• Particular line item bids appear to be unreasonably low
• Subsequent change orders reducing requirements for low bid line item
• Particular line item bids do not appear to have been performed or purchased as specified in the contract
• Bidder close to procurement personnel or participated in drafting contract specifications
 Unjustified sole source awards
Often as the result of corruption, a procurement official can avoid or defeat competitive selection requirements by making an improper sole source award to a favored contractor. Such awards can be made directly, citing special circumstances, or by manipulating the bidding process to avoid the competitive bidding limit, etc. If corruptly motivated, such awards often result in higher prices, lower quality or other disadvantages to the contracting organization.
The major red flags of unjustified sole source awards
• Sole source award above or just below competitive bidding limits
• Previously competitive procurements become non-competitive
• No justification or documentation for non-competitive awards
• Split purchases to avoid competitive bidding limits

• Awards made below the competitive bid limits that are followed by change orders that exceed such limits
 Unnecessary purchases
Unnecessary, excessive or inappropriate purchases of goods or services, or unnecessary repairs, might indicate corruption or purchases for personal use or resale.
The major red flags of unnecessary purchases
• Unusual or unexplained high volume purchases of products or services from a particular supplier
• Surplus sales followed by reorders
• Replacement or repairs after unreasonably short time period
• Inadequate or rushed needs analysis and justification
Indicators of Common Procurement Fraud
Throughout the supply chain from procurement to distribution employees as well as external parties (such as suppliers, distributors and competitors) have opportunities to commit procurement fraud. These opportunities range from false invoicing, bribery and kickback schemes to inventory theft and substandard goods.
Some of the “red flags” to look out for include:
 Poor or non-existent record-keeping
 Higher-price, lower quality goods
 Excessive entertaining of procurement staff by suppliers
 Deviations in communications between procurement staff and suppliers, such as calls or text messaging to mobile phones
 Procurement staff demanding extended periods of notice before they allow an audit to take place
 Inexperienced buyers dealing with overbearing suppliers
 Buyers not taking leave for extended periods
 Excessive supplier hospitality to selected staff
 New suppliers continually facing entry ‘Obstacles’
 A buyer’s lifestyle changing dramatically
 Pricing schedules being completed in pencil
 Suppliers and contractors being very familiar with senior staff
 Specifications favouring a particular supplier
 Supplier payments going unchallenged
 The absence of supplier approval data
 No supplier visits or audits.

We also look closely at data and other records. Our attention is typically focused on:
• “After-hours” transactions
• Matching employee and vendor details
• Short-term changes to employee or supplier accounts
• Inappropriate authority to transact deals
• Conflicts of interest
• EFT transactions conducted without the appropriate approval
Factors Influencing Procurement Fraud and Corruption
Motivational factors –motivation and opportunity are the elements that generally underlie the commission of fraud and corruption. These could take the form of:
a. Economic motivation –financial need or gain is the most common motivation for fraud and corruption. Often persons convicted of fraud and corruption, complain that they had unbearable financial problems for which there was no legitimate recourse.
b. Greed – persons with power and authority often commit fraud and corruption because they are motivated by greed.
c. Prestige or recognition –persons may feel they deserve more prestige or more recognition. These persons are often motivated by jealousy, revenge, anger, or pride. They often believe that they are superior to others and can commit fraud and corruption without being discovered or detected.
d. Moral superiority –persons may also be motivated by a cause or values that they feel are morally superior to those of victim or the government in this case.
Organizational / environmental factors.
a. The organization atmosphere and its perception play a major causative role in perpetration of fraud and corruption.
b. Where management is perceived as insensitive, insecure, impulsive or too strict, ill-treats employees and judges performance either or short term results or without considering operational constraints, the disgruntlement in the employee is likely to result in instances of fraud and corruption.
c. Systems and procedures adopted in organizations and organizational policies are particularly important. An organization in which the corporate policies are unclear, there is inadequate internal control, excessive reputations, ‘red-tapism’; inadequate accountability or history of programme abuse is likely to have more instances of fraud and corruption.

d. An understanding of the organizational atmosphere will enable an audit to assess whether there is a higher risk of fraud and corruption in the Entity and planning of the audit could be suitably modified. Poor management structure and policies are indicated by a high turnover of employees, absenteeism, poor documentation, low awareness of regulatory requirements and lack of transparency in reward systems.
e. It is important for one to understand that very often the perpetrator of fraud and corruption rationalizes his actions with some kind of justification. For instance, an employee accused of fraud and corruption is likely to rationalize his actions by saying or believing that his low pay justifies the action or since everybody is doing that he is also well within his right to do it; while a contractor could justify his acts of fraud and corruption as a cost of doing business or problems of securing contract from a government entity.
Fraud Prevention Measures
• Spend and recovery audits –procurement entities should undertake a spend-and-recovery audit on their accounts payable system, to detect overpayments to suppliers. This is a matter of urgency for organizations which will shortly be closing.
• Procurement fraud training-procurement bodies such as KISM and CIPS should work with the Government to develop and deliver a procurement fraud training module for new and existing public sector procurement specialists. Consideration should also be given to providing procurement fraud training to staff who audit or assure procurement processes.
• Transparency- procurement entities should be encouraged to publish all spending activity. This push for greater transparency over public spending will be positive step in efforts to disrupt and deter procurement fraud.
• A counter fraud culture in public procurement-A counter fraud culture amongst procurement specialists is important in disrupting and preventing procurement fraud. The complexities around detecting and preventing procurement fraud, particularly in the pre-contract award phase, mean improving the awareness and understanding of the problem amongst procurement specialists must be the first step. Elements of an effective counter fraud culture include awareness of the problem, an understanding of how and why the problem should be mitigated, and the creation of suitable incentives to prevent, detect and report suspicions of fraud. Procurement fraud training will provide a basis for embedding a counter fraud culture.

• Fraud risk assessments- The key to establishing a holistic approach is to ensure fraud risk assessments are undertaken before embarking on procurement. Risk assessments work in two ways. Firstly, they must be undertaken before the procurement process is underway, in order to identify and mitigate fraud risk. Secondly, assessments must be undertaken by auditors once the procurement process is complete the aim being to detect fraud and take appropriate action.
• Data analytics- It should be deployed to detect anomalous behavior. Consideration should be given to adapting analytical techniques to detect insider-enabled procurement fraud.
• Whistle-blowing and fraud reporting- Where risk assessments and the use of analytics detect suspected fraud, it is crucial that suspicions are reported and properly investigated. Many public bodies run in-house whistle-blowing services for staff. A cross-government fraud reporting service should be created, so that suspicions of procurement fraud can be reported by staff and members of the public. This service should be linked to the Kenya Fraud Intelligence.
• Having defined procurement process -Ensure the procurement process is followed and is enforced. Has an order been placed before the procurement paperwork has been raised?
• Monitor the procurement process- Regular checks on quality are a must. Deloitte’s Forensic practice in Hong Kong reports that the saying in China “heaven is high and the Emperor is far away” is an increasing reality and a growing concern. If a supplier is based in China and is responsible for providing finished goods to a corporation based outside of the country, the supplier may be able to operate with little or no supervision, taking advantage of various schemes that may be contrary to the interests of the buyer, such as:
– Production of counterfeit goods
– selling finished goods at reduced prices
– Outsourcing manufacturing to third parties
– offering bribes to government officials to avoid being sanctioned for non-compliance with regulatory requirements
– Producing fraudulent financial statements
– Tax evasion
• Developing clarity around definition and consequences of fraud, through a communicated policy.
• Having a defined process and communication policy for dealing with fraud

• Development and application of codes of ethical conduct in procurement activities, audit trails etc.
• Rotation of buyers, to prevent any buyer becoming ‘too cosy’ with suppliers.
• Controls over preferred supplier lists and single-sourcing
• Having a system for the control and management of payment to suppliers.
• Use of effective terms and conditions of contract;
• Audits of key systems on a periodic basis;
• Segregation of duties;

Internal control system helps prevent and detect procurement fraud and error
• Supervision. This serves to prevent fraud or error by boosting the awareness of senior employees who will refrain from committing fraud and error by virtue of constant review of operations.
• Physical controls. These limit access to the assets of the company thus preventing them from damage, misuse or theft.
• Segregation of duties. This boosts automatic checks, accountability and supervision at all stages of processing transactions, minimizing chances of error and fraud
• Arithmetic and accounting controls. Proper recording of transactions according to the principles of ISAs will prevent errors and frauds such as manipulation of accounts.
• Personnel. Engaging qualified, competent and efficient personnel will reduce chances of errors. The company’s staff should be motivated and properly remunerated to prevent temptations of fraud.
• Routine and automatic checks. These minimize fraud by boosting awareness that work will be continuously checked, accountability will be increased and importance of being honest will be emphasized.

Fraudulent Procurement Activities in the Purchasing Cycle
Lysons, K. & Farrington provide a list of fraudulent procurement activities that may be committed at the various stages of the procurement process as including but not limited to the following:
Establishing need for goods or services
• Maintaining excessive stock levels to justify purchases.
• Declaring serviceable items as excess or selling them as surplus while continuing to purchase.

• Procurement in response to aggressive sales activities
• Estimates prepared after RFQs requested
• Failure to develop alternative sources
Specifications development stage
• Defining specifications to fit capabilities of a single contractor.
• Defining specifications to fit a single product.
• Advanced release of information to favoured contractors
• Selective release of information to favoured contractors
• Breaking up of requirements to allow rotation of bids.
• Vague specifications that make comparisons of estimates complicated.
• Other relevant points would be acceptable
Pre-solicitation stage
• Unwarranted sole source justifications
• Erroneous statements to justify sole source
• Justification of sole source signed by managers with no authority
• Technical personnel providing advance information to carefully selected suppliers
• Invalid restrictions in RFQ documents to limit competition

Solicitation stage

• restriction on procurement to prevent/obstruct qualified suppliers
• limiting time for submission of tenders so that only those with advance information can respond
• improper social contact with supplier representatives
• Conducting bid conferences in such a way that bid rigging or price fixing is facilitated.
• Discussions with personnel about likely employment with a supplier or subcontractor.
• Rendering special assistance to a supplier in preparing their bid

Bid acceptance stage
• Improper acceptance of a late bid
• Falsification of documents or receipts to get a late bid accepted.
• Change in the bid after other bidder prices are known
• Falsification in supplier’s qualifications, financial capability, successful competition of previous job and so on.
• Submission of the bids by one bidder in a different party’s
• False certificates, such as insurance.
• Rejection of bids without any valid reason
• Deliberate loss of bids
• Exercising favoritism towards a particular supplier during the evaluation process.
• Using biased individuals on the evaluation panel
• Failing to forfeit bid bonds when a supplier withdraws improperly
Post Contract award stage
• Certifying goods without carrying out inspections
• Action not taken for the non-compliance with terms and conditions.
• Double payments for the same items/services
• Contract files are incomplete
• Substitution of specified goods with used or inferior goods
• Time sheets signed for hours not expended
• Expenses paid when not incurred
• Essential spared not delivered but invoiced
• Invoices settled earlier than contract requires
• Payment for non-delivered goods/services
• Unsubstantiated cost growth
• Charges for skills levels below those contractually agreed.

Difficulties in Tackling Procurement Fraud

1. Difficulty in detecting procurement fraud: The complex and diverse nature of procurement fraud means it is difficult to detect.
2. Difficulty in measuring procurement fraud: Given the challenges of detecting procurement fraud, there can be little confidence that detected cases reflect the true extent of the threat. In both the public and private sector, accurate losses to procurement fraud remain unknown. As with other fraud, procurement fraud goes undetected, unreported, and therefore unmeasured. The challenge remains to gain an accurate measure of procurement fraud losses in the public sector.
3. Lack of consistent and proactive risk assessment: Awareness and understanding of the nature of procurement fraud forms the basis of preventing this type of fraud. Awareness and understanding amongst procurement specialists as well as the supplier market. Risks are considered, but these are mainly focused on the ability to deliver the project to time, cost and quality, rather than specifically identifying and mitigating fraud risks. Lack of awareness and understanding creates an environment where procurement fraud can flourish. If public bodies are not considering the risk of fraud before they embark on procurement, then procurement fraud can go undetected.
4. Absence of a procurement fraud strategy: Where procurement fraud is tackled in the public sector, it is generally through a traditional enforcement model of investigation, prosecution and sanction. While it is important to punish fraudsters, this approach is time consuming, expensive and often does not result in conviction or recovery of lost funds.

Review Questions

1. Discuss the four T’s of supply chain risk management
2. Discus the four strategies of managing supply chain Risks
3. Discuss the Contractual provisions to include in a contract to manage supply chain operation risks (for example supply risk, quality risk, international risk, technology risks)
4. Discuss the challenges (risks) of sourcing goods and services from abroad
5. Discuss the role of risk management committee
6. Explain five ways of creating the desired risk culture
7. Explain five benefits of effective risk management
8. Explain the Purpose and benefits of using a risk register
9. Explain the contents of a risk register.

10. Recently in Kenya there have been claims of procurement fraud in more than one procurement entity in Kenya. Among the examples are Kenya Youth Fund and the IEBC where billions of shillings got lost. Required:
a) Suggest the possible five types of procurement fraud that these companies might have engaged in and indications of red flags of each type of fraud.
b) Recommend five strategies to control and manage procurement fraud in procurement entities
c) Discuss five contractual provisions that a procurement function could use to manage the risk of fraud in the supply chain.
d) Discuss five risk assessment techniques that could be used to reduce the risk of procurement fraud.

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