How to Prevent Procurement Fraud, Part 1

In today’s business world it is exceedingly important for business owners and operators to take steps towards procurement fraud prevention.  Procurement fraud costs businesses millions of dollars every year, losses that can likely be avoided if certain measures are taken to assist in procurement fraud prevention.  Whether a business is small, medium or large, procurement fraud may occur.  The following information is designed to explain how you can take measures to prevent procurement fraud by taking steps to segregate duties, by having regular audits and by using purchasing controls to your advantage.

Segregate Duties

One way that managers and business owners can promote procurement fraud prevention is by segregating duties.  In other words, in any business transaction, more than one individual should play a role.  For example, the person who starts the purchase order process should not be the same person who will approve the payment.  In addition, the person who takes the payment should not be the same person who handles bookkeeping matters. 

Some smaller businesses fail to segregate duties for their employees, either because they are too short staffed to do so or because they are simply too short sighted to do so.  Procurement fraud can start off on a very small scale, but the costs truly add up and if individuals see that they are getting away with it they may continue to do so for years and on a much larger scale.

Conduct Regular Audits

Segregating duties is an important first step, but it is not enough for thorough procurement fraud prevention.  Conducting regular audits of all of the business’s purchasing practices is vital to preventing procurement fraud.  Estimates by PricewaterhouseCoopers suggest that regular audits are responsible for the detection of almost 20 percent of all reported cases of fraud.  Best practices for audits involve having some that occur on a regular schedule, and others that are ‘surprise’ audits so that those who may be engaged in procurement fraud will be caught off guard. 

If your business is too small to be able to afford its own internal department tasked with doing audits, you can still conduct audits by hiring an outside consultant to come in to audit your business.  Such an individual will typically examine contracts, financial documents and internal work processes.  Any accounts that do not reconcile may be a red flag that indicates that procurement fraud may be occurring.

Install Purchasing Controls

Another excellent way that companies can engage in procurement fraud prevention is by having clear policies that delegate who is able to make purchases for the business and to have monetary thresholds for such purchases.  It is also a good idea to keep a list of approved vendors and to encourage those employees who have purchasing power to keep their transactions between them and the list of approved vendors at all times.  Corporate credit cards are another great idea, and there is software you can invest in that will help you to keep track of all expenses so you can see how money is being spent.