Procurement fraud

Investigative techniques
to help mitigate risk
A whistleblower at a large manufacturer alleged that an
employee in the procurement department was colluding with
a vendor to bill the company for security services that were
allegedly never rendered. The investigation revealed several
large round dollar invoices billed for security at events that
the company had no record of ever occurring. The vendor
admitted in an interview that some of the invoices were in
fact fictitious while other invoices were for legitimate services
rendered to the company. This scheme lasted several years and
cost the company hundreds of thousands of dollars before the
whistleblower, who worked for the employee in procurement,
tipped off internal audit.
An analysis of purchases by the maintenance department
of another large company revealed that the price paid
for various supplies was two and sometimes three times
higher than market value. An investigation revealed a
connection between the vendor and maintenance department
procurement officer.
These two real life examples have a common thread. Both
companies had controls in place such as segregation of duties
and supervisor approval that were either overridden by either
collusion or abuse of approval authorities. Learning from the
investigative process that uncovered the techniques used to
perpetrate the frauds, and employing similar investigative
techniques to assess procurement activity on a periodic,
proactive basis may be helpful in identifying anomalies like
relationships between employees and vendors and anomalies
in the pattern of purchasing.
The Association of Certified Fraud Examiners describes
occupational fraud as the use of ones occupation for personal
enrichment through the deliberate misuse or misapplication
of the employing organizations resources or assets. Fraud
is a potential risk in most businesses. Organizations instill a
certain amount of trust in their employees in order to operate,
and those within the procurement function are entrusted with
access to vendor selection, vendor files, accounts payable,
invoice approval, and purchase orders, which can provide
an opportunity to commit fraudulent activity such as bid
rigging, false billing schemes, vendor kickbacks, and conflicts
of interest. Whether the employee is a purchasing agent,
controller, accounts payable manager, or any other employee
essential to the operations of a business, a dishonest employee
can present a potential fraud risk for the organization.

The degree of risk a business may face can be assessed by

examining Donald Cresseys Fraud Triangle and determining
if any of its factors might be an issue for employees
with purchasing responsibilities. Cressey proposed that
employees are more likely to commit fraud if three factors
exist: 1) incentives and pressures, 2) opportunity and
3) rationalization. Given the increased financial tension
in todays economy, more and more employees could
be feeling increased financial pressure and reductions in
resources due to layoffs may compromise segregation of
duties potentially creating more opportunity for dishonest
behavior. In addition, because of the current economic
environment, some employees may feel they can justify, or
rationalize, their behavior. This situation can be perceived
as an ideal opportunity by dishonest employees, including
those who might be involved in procurement duties within
an organization. If dishonest employees feel an increased
pressure to perform or produce results, and if an organization
is simultaneously lacking appropriate controls and segregation
of duties, such employees might view this situation as an
opportunity to use their procurement role to commit fraud.
Some of the methods a procurement employee may use to
commit potential fraud include:
Kickbacks. Kickbacks are the giving or receiving anything
of value to influence a business decision. Kickbacks may be
undisclosed payments made by vendors to employees in
return for favorable treatment, such as bid rigging or inside
bidding information. The vendor may also approach an
employee about submitting or approving invoices for goods
or services that were never received, and in exchange the
vendor provides the employee with a kickback. Kickbacks
can be payments of cash, but can also be in a form that is
more difficult to detect, such as payment of personal loans
or credit card bills, transfers of property or vehicles at less
than fair market value, lavish vacations, or a hidden interest
in the vendors business.
Conflicts of interest. If an employee has an interest in the
financial well-being of a vendor, a conflict of interest could
exist. This may take the form of being a part-owner in the
vendor company, or knowing someone close, e.g., a spouse
or other family member, who works for the vendor and can
receive rewards for business the employee provides. Any of
these situations can impair a dishonest employees ability to
conduct business with the organizations best
interests in mind.

It is important to be aware of anomalies in the purchasing

function such as:
Expenditures do not make economic sense (dollar amount
and timing).
Orders are consistently made from one vendor without
inquiring with other vendors for comparison purposes.
Costs of goods or services are higher than
competing vendors.
Poor documentation for expenditures.
One-time payments to vendors (vendor often not officially
set up and cleared through accounts payable).
Large round-dollar payments.
Data analysis can help with identifying anomalies in
purchasing. For example, analyzing the vendor database,
payroll database, and accounts payable database can assist
organizations identify potential undisclosed relationships
between employees and vendors and identify anomalies in
purchasing for potential follow-up such as:
Common bank account, address, and phone numbers
between vendors and employees that may indicate a
potential conflict of interest.
Duplicate invoices with the same supplier.
Invoices from different suppliers with the same dollar
amount, date and invoice number.

suspicious about certain transactions. Interviews at all levels

within the company can give insight into the daily operations
and can reveal fraud risks which may be otherwise unknown
to the organization.
Background checks can provide information on the
background, integrity, and reputation of selected individuals
and entities. A small amount of time spent performing a
background investigation, such as Secretary of State records
searches, might reveal connections between employees
and vendors. Additionally, it can provide history on vendors
performance, legal proceedings, and other
relevant information.
Electronic discovery, such as extracting and analyzing email
files, can identify any questionable correspondence between
vendors and employees using an organizations computers.
These tools can be used proactively by organizations to help
identify potential fraudulent activity. Recognizing the red flags
commonly associated with procurement fraud and using
tools such as data analysis, in addition to other investigative
techniques such as interviews and background checks, can
go a long way in helping the organization mitigate the risk of
fraud in the procurement function.

For more information, please contact:

Data analysis can provide trend data, such as the number of
invoices from suppliers over time, unusual invoice number
sequencing, and dollars spent for goods and services
purchased from a particular vendor. This can assist with
answering the question, does the dollar amount and
timing of purchases from a particular vendor make sense?
Furthermore, analyzing the actual purchase orders and invoices
can assist with answering the question, does the price paid
for the goods and services make sense?

Ron Schwartz
Partner
Deloitte Financial Advisory Services LLP
+1 404 220 1540
rschwartz@deloitte.com

In addition to data analysis described above, some commonly

used investigative techniques can also be used to help identify
anomalies in purchasing:
Employee interviews can be useful in discovering potential
procurement fraud. Interviewers sometimes find that
employees have information about potential inappropriate
relationships between employees and vendors or are

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