Beating Fraudsters at Their Game: Insights on How Procurement Solutions Help to Curb Fraud
(Published May 30th, 2019: MWUG Spring Newsletter)
Fraud cases are on the rise. Today, many businesses fall prey to fraudsters, thanks to technological loopholes. Fraud has adverse effects on an enterprise regardless of the size. Among the main outcomes of fraud include financial loss, tarnished reputation, loss of credibility, increased audit costs, legal ramifications, and decreased employee morale. Recently, the media reported that Facebook and Google(1) became victims of fraud resulting in the loss of $99 million and $23 million respectively.
A report by the Association of Certified Fraud Examiners(2) shows that on average, companies lose approximately 5% of their gross revenue with small businesses accounting for 30% of all fraud cases. Regrettably, 60% of small businesses do not recover the funds they lose. Small and medium enterprises are more vulnerable to fraud because they lack or have few fraud prevention tools or controls.
Although it is nearly impossible to prevent all fraud cases, organizations can use technology to lower fraud risks and detect fraud cases before they escalate. New and up-to-date technology is fundamental to combat fraud effectively using data solutions, procedures, workflow, and improved risk management. However, advanced technology is not enough to detect and prevent fraud. Technology has to be complemented with policies(3) for detecting attacks early on. Additionally, while technology helps in the fight against fraud, fraud should be perceived as both a business problem, and an IT one.
There are many technological tools that businesses can use to prevent and detect fraud. Procurement solutions are a good place to start.
Procurement solutions
These are technological solutions that allow firms to manage their procure-to-pay process from the time of procuring goods and services to paying for them. Procurement solutions save businesses time, effort, and the cost incurred when procurement processes are done manually. They use automation and ‘dynamic’ rules-based approval routing to help businesses save time, reduce costs, increase efficiency, and streamline procurement processes.
Importantly, procurement solutions help to prevent and detect fraud by injecting an entirely new level of visibility and efficiency that is unachievable in manual processes. Also, procurement solutions help prevent and detect fraud by performing the following;
. Increasing transparency in procurement
Imagine a situation where only one person communicates with suppliers. The person is responsible for issuing purchase orders, receiving receipts, and paying for invoices. Such a setting characterized by lack of visibility can open doors to potential fraud. Kickbacks can thrive in such a situation whereby the supplier pays a kickback –cash payments, favors, or influence- to the purchaser.
Also, lack of visibility can result in the individual submitting an order to a fictitious firm, invoicing and paying for goods never delivered. In 2016, Samsung experienced such a procurement fraud where a fictitious organization was created and payment made for services not rendered. Between 2002 and 2007, Samsung lost more than one million dollars (4). Luckily, with procurement solutions, you don’t have to fall prey to fraudsters. Procurement solutions improve the transparency and visibility of the entire procurement process and pluck any seeds of fraud.
Procurement solutions offer superior spend visibility. They allow enterprises to track all their transactions and identify the destination of funds. The good thing with spend visibility(5) is that with the use of ‘built-in’ business intelligence you are notified in case of any red flags. For example, if you pay a supplier $4,000 regularly and the amount then skyrockets to $8,000, the procurement solution alerts the appropriate individual, or group of individuals (depending on the rules structure) to the irregular spend. You can investigate why the amount increased drastically. Maybe the supplier increased his suppliers, the price of goods increased, or the supplier is trying to defraud you.
Remarkably, e-invoicing allows for three-way matching where purchase orders, goods receipts, and invoices are checked to ensure that suppliers are paid for what they delivered. Does the amount documented on the purchase order, receipt and invoice align? This way, you can find a fraudulent transaction before making the payment.
Business leaders can access dashboards and generate reports from procurement solutions that provide useful information in fraud detection and identify anomalies in procurement. You can’t see red flags, or irregularities if you don’t have readily accessible information. Regular examination of this information helps identify over-payments, unreasonable pricing, and other anomalies that call for an investigation.
. Automating invoice processing:
Manual invoice process is time-consuming, labor-intensive, and error-prone. Employees and other third-parties can take advantage of the flaws of manual invoice processing to defraud a company. Nevertheless, when invoice processing is automated, errors are prevented, and efficiency is enhanced. Any suspicious patterns and trends can be identified and investigated. Automated invoice processing can help to reduce fraud cases significantly.
A centralized and automated invoice processing with well-defined processes does not leave any room for fraud. It has checks and balances that improve efficiency and promote transparency. For example, in the case of big purchases, more than one manager can be required to approve the payment. Also, the person who generates orders is not the one who approves payments. Through the use of approval routing, automated invoice processing ensures that orders get the right authorization level. As a very simple example; payments below $5,000 can be authorized by an individual manager while payments above $10,000 can be approved by two senior managers. With the utilization of dynamic approval routing, rules can be setup to be as simple or complex as the organization requires.
. Avoiding duplicate payments
Duplicate payments are a prominent fraud point for many businesses. There are cases of employees colluding with suppliers to defraud an organization using duplicate payments. Employees take advantage of the lack of controls(6) in procurement departments to perpetrate this fraud. Although some duplicate payments are accidental and not fraudulent, they still cause financial loss for companies. With procurement solutions, duplicate payments become a thing of the past with the help of automation saving a company thousands or potentially millions of dollars.
Technology is a powerful strategy for preventing and detecting fraud. However, it should be used in conjunction with people and processes for detecting fraud. Organizations can start by creating a culture of system-wide accountability and transparency based on processes and communication. They should remember the cost of preventing fraud is far less than the cost of fraud on a firm. Procurement solutions are excellent mechanisms for avoiding fraud. For more information about ISS Group’s advanced Procure-to-Pay and Supplier Relationship Improvement solutions, please contact us for a 15-minute overview demonstration to learn more about how we can help.
Sources:
1. https://boingboing.net/2019/03/24/evaldas-rimasauskas.html
2. https://www.acfe.com/rttn2016/docs/Fraud-in-Small-Business.pdf
3. https://www.inc.com/keith-mueller/technology-shaping-the-fight-of-fraud-in-2015.html
4. https://www.justice.gov/usao-nj/pr/former-samsung-america-director-sentenced-75-months-prison-embezzling-more-1-million
5. https://www.issgroup.com/2019/01/08/how-technology-makes-building-and-improving-supplier-relationships-simple/
6. https://medium.com/@erasmusbpas/procurement-fraud-schemes-and-how-to-prevent-them-aaef756ddfda
