Preventing procurement fraud and corruption

opinion June 01, 2012 00:00

By Peter David Hamilton

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The supply chain is the one area in any company that is very vulnerable to fraud and corruption.


Whilst a company can implement controls to reduce illicit rebates and dubious vendor relationships, the risk of it occurring can never be fully eliminated. 
During a normal business cycle a high-risk fraud environment is typified by pressure, rationalisation and opportunity. These factors have been exacerbated by the global financial crisis. With many companies forced to lay off employees, there has been an increase in pressure on individuals to meet and maintain previous growth targets. In such circumstances, it is easier for individuals to rationalise unethical behaviour as an essential means to an end, ie to ensure personal financial survival. All that is needed to complete the basic elements required for fraud to happen, as described in Cressy’s Fraud Triangle, is the opportunity to do so.
Such opportunities exist in all companies – for unethical individuals it is simply a matter of finding them. As such, it is just a matter of time before a company becomes the victim of fraud or corruption. When this happens, a company often does not even know that it is being targeted.
The typical response perpetuates the problem
To preserve the reputation of the company, management often elects to deal with such instances internally and allow implicated employees to resign with their reputations intact. While this may not have demonstrable negative effects on the company at the time, it increases its vulnerability in the long run, for a number of reasons:
It sends the wrong message that corruption does not have any real consequences.
It has the potential to further expose the company to the fraudulent behaviour of the same individual, as he/she could end up being employed by a supplier or customer.
The act may eventually become known and damage further the very reputation which the cover-up sought to protect.
The consequences of fraud and corruption can be severe
Apart from the financial implications, which can be severe, the fallout from a reputation perspective can be disastrous, particularly for listed entities. In addition, corruption increases the cost of doing business, undermines competitiveness and inhibits economic growth. These negative consequences apply equally to the public and private sectors.
Thailand is renowned for its lack of transparency with respect to procurement contracts with government agencies, and numerous cases have been exposed over the past decade, highlighting weaknesses in its procurement system. The scandal surrounding the Suvarnabhumi Airport scanners is just one notable case, the ongoing allegations surrounding the rice pledge scheme, another. 
Thailand – strengthening anti-corruption measures and public procurement process 
As part of the Thai government’s progress in strengthening anti-corruption measures Thailand ratified the UN Convention Against Corruption (UNCAC).
The UNCAC requires that national legislation be amended to comply with its principles, and the Thai government has moved towards implementing the required changes. One significant amendment has been to allow the National Anti-Corruption Commission (NACC) to set up conditions under which contractors of large public projects must provide detailed income and expenditure accounts, and submit such information to the Department of Revenue for checking and thereby improve transparency of transactions.
How to spot fraud and corruption
The supply chain presents many opportunities for corruption. These range from false invoicing, bribery and kickback schemes to inventory theft and substandard goods.
Red flags include:
_ Poor or non-existent record keeping.
_ Higher price/lower quality goods.
_ Excessive entertaining of procurement staff by suppliers.
_ Procurement staff demanding extended periods of notice before they allow an audit to take place.
_ Staff not taking leave.
_ Preference given to selected suppliers regardless of pricing/quality.
Whilst the risk of fraud cannot be eliminated entirely, it can be greatly reduced with the right approach.
Good arguments for prevention
Thailand’s trading environment provides many business opportunities. In order for these to be fully exploited, investors must exercise a degree of caution and approach each one with scepticism.
If appropriate prevention and detection methods are not implemented, companies may suffer loss of revenue and profit. Routine checks for non-deliveries, repeat deliveries for the same order and discrepancies between purchase orders and delivery are a few of the procedures needed to reduce fraud risks.
Prevention is always better than cure. The amounts paid to settle any claims resulting from exposed fraud will always be secondary to the loss of reputation and integrity that companies may suffer for being associated with such claims.
In the long term, money and effort spent on prevention prevents future losses and makes good sense.
Peter David Hamilton is an associate director of Financial Advisory Services at Deloitte Touche Tohmatsu Jaiyos.