Procurement fraud is a growing phenomenon around the world. A recent study conducted by ACFE revealed that an estimated 5% of revenues are lost each year as a result of fraudulent activity. At Governance Week 2013, enterprise risk management specialist André Stürmer of Inoxico highlighted the importance of transparency and disclosure in combating supply chain fraud.
This year’s event, hosted in Johannesburg, focussed on taking governance to the next level and enhancing the relationship between business, government and other key stakeholders to drive economic and societal change. Many organisations view governance as a necessary evil that consumes valuable time and resources without providing much in terms of return on investment or business enablement.
The event addressed this misconception, positioning good governance as a means of building the integrity and brand equity required to attract local and foreign investment and development funding.
“These best practices and processes provide a valuable foundation for growth, critical for Africa and other emerging markets where the supply chain is becoming increasingly strategic. Attractive trade agreements mean crossing borders and globalisation, yet unfortunately introduce a greater opportunity for fraud,” says Stürmer.
“CEOs and CFOs are recognising that a well governed supply chain is as important to a healthy bottom-line as an efficient supply chain. Safeguarding the integrity of a company’s supply chain has become a critical component of risk management for any organisation.
“Procurement fraud is one of the most costly types of financial crimes that affect businesses across a broad spectrum of industries, particularly during times of an economic downturn,” says Stürmer.
The statistics are sobering: 42% of fraudsters are employees; 38% are managers and 18% are owners or executives. Even more concerning is the rate at which these activities are escalating. PwC’s Forensic Services Practice in 2011 stated that 36% of internal economic crimes were carried out by senior management, compared to only 17% in 2009.
A key contributor to procurement fraud is conflict of interest.
“When an employee has a vested interest in the financial well-being of a vendor, be it as a part-owner in the vendor company or a close affiliation such as a spouse or other family member, this conflict of interest can detract from the ability to conduct business in the organisation’s best interests,” says Stürmer.
While eliminating all possible conflict of interest would be ideal, the limited talent pool available in South Africa makes it nearly impossible to avoid these relationships entirely. Stürmer revealed that directors on the boards of 20 of South Africa’s largest companies hold 14 other directorships on average.
“However, with full disclosure, potentially conflicting parties are able to remove themselves and maintain reasonable distance between themselves and certain decisions in the supply chain, limiting their influence – and risk.”
The challenge is when relationships are withheld or not immediately identifiable. Relying solely on self disclosure is a risk, and one that can be removed through data-driven intelligence. This is where tools such as the Inoxico Matrix can assist in providing accurate, valuable insight into not only first, but also second and third degree relationships and beyond, where fraud is more likely to occur – and less likely to be traced.
The best means of mitigating fraud in procurement operations and guaranteeing both economic growth and development sustainability remains strategic governance and transparency in all transactions.
“Full and ongoing transparency is imperative to limit procurement fraud, and technology is available to build such transparency. Clearly defined, enforceable policies need to be in place and then combined with good examples set by top management. These are the most direct and effective recourses available. “
Regardless, decision makers need to appreciate governance for what it is – an important factor in increasing business performance, reducing risk and a means of combating the growing problem of misappropriation, reckless spending and fraud – whether this be in procurement or elsewhere in the business.