Procurement Fraud: Outsourcing Services, Not Assets

As organizations continue to seek efficiencies by outsourcing services and goods, they have become more vulnerable to procurement fraud.  Below are warning signs of procurement fraud that all managers, board members and advisors should be alert for.

Complaints

Complaints regarding low quality, inadequate quantity and wrong products may reflect a vendor’s intentional actions.  Often, unscrupulous vendors will plead ignorance and seek forgiveness once caught.  Until being caught, they can profit from their actions.  Furthermore, listening thoughtfully to complaints from vendors who lost in bidding situations may uncover deeper problems.  For example, awards repeatedly going to another vendor may indicate a level of collusion between an employee and that vendor.

Patterns

In addition to repeated awards to the same vendor, other patterns can include one vendor pricing well below the norm, which may suggest the use of inferior products, or a few vendors pricing well above others, which may suggest an attempt at price fixing.  Additionally, a pattern of multiple contracts just below bidding thresholds, and to one vendor, may be an intentional act by an employee to drive work to that vendor in exchange for kickbacks.

Fabricated pricing

When organizations have no expertise to allow the recognition of appropriate pricing, some vendors will abuse this situation by working with other vendors to inflate pricing.  For example several vendors may work together to take turns submitting proposals that make one appear to offer a great price.  In reality, all may be grossly overstated although one is less so than the others.

Changes

Frequent contract revisions can be the result of collusion.  “Urgent” needs on existing contracts, prohibiting the ability to appropriately bid goods or services may also be a red flag.
 
The above examples are some of the more common problems in procurement fraud, but are far from a comprehensive list of risks and warning signs. 

With a lack of internal controls and/or a limited amount of oversight, selecting deals that seem too good to be true may result in organizations “getting what they paid for”…or even worse, not getting what they paid for.

If you would like help improving your internal controls, or more information on how Red Flag Reporting can help you in protecting your assets, employees and reputation, contact Marvin Willis.