LECTURE 9

PROCUREMENT FRAUD
 Learning Objectives

At completing this unit students should be able to:

• Define fraud in general and relate to
procurement.
• Know the nature of fraud in organisations and in
supply chain.
• Know the circumstances under which fraud can
occur.
• Know various preventive measures of fraud in
organisations and in supply chain.
 Definition of Fraud

• There is no precise legal definition of

fraud, but a general definition is ‘an act of
deliberated deception, with intention of
gaining some benefits ‘(Chambers
Concise Dictionary), or, more specifically,
deprivation by deceit’
 Definition of Fraud

• It could also be defined as any intentional

act or omission designed to deceive
others, resulting in the victim suffering a
loss and/or the perpetrator achieving a
gain, usually, monetary form.
 Nature of Fraud in Organisations and Supply Chains

The removal of funds or assets from an

organisation. This could be in a form of:
• stock,
• equipment
• stationary.
• overstatement of expenses claims,
• the authorization of salary payments to non-existent
staff members;
• the creation and payment of false invoices
purporting to be from suppliers.
 Nature of Fraud in Organisations and Supply Chains

• Intentional misrepresentation of the

financial position to the business, in order
to mislead shareholders, taxation
authorities or regulatory authorities.
• This includes omissions or mis-recordings
in the company’s accounts, and
falsification of data of financial statements:
overstating (or understanding) profits or
stock valuations- and so on.
 Procurement fraud
• falsifying Supplier invoices (and pocketing
Payments), or
• misusing corporate procurement cards for
personal use.
• Buyers may also defraud vendors on behalf of the
organisation (rather than for personal gain),
through tactics such as: falsely claiming that
stocks has been undelivered;
• temporarily withholding payment, on false
excuses; and not settling invoices at all.
 Other forms of Fraud
• Online fraud: involving fake or stolen credit
cards used to buy merchandise from e-
commerce businesses.
• Telephone fraud: abuse of office telephones
(eg to make expensive intensive international
calls) by employees and/or hackers.
• Being used for fraud: the organisation
being a ‘vehicle’ for employee fraud (eg
money laundering or collusion)
 Other forms of Fraud
• Corporate identity theft: faking corporate identity
in emails and websites to gain access to people’s
bank account details and passwords.
• Minor fraud: eg employees using corporate
facilities, equipment or staff for their own
purposes; pilferage and so on.
• Competitor fraud: competitors gaining unethical
access to data or competitive intelligence (eg by
bribing customers or staff)
• Supplier- Related Fraud
 EMBEZZLEMENT

• This is used for the fraudulent appropriation of

funds or property by a party to whom they have
been entrusted, but which belongs to someone
else.
• The key difference between embezzlement and
theft is that the embezzler has been given the
legitimate right to possess, use, and/or access
the assets in question-but has then withdrawn,
misappropriated and used them in a way that
was not intended or sanctioned by the owners.
 EMBEZZLEMENT

• Embezzlement often occurs over long

period of time, with the trusted individual
appropriating only a small fraction of the
total he receives or controls in any one
allocation or transaction, minimising the
risk of detection.
 Why fraud occurs

Sadgrove argues that there are four main

pre-conditions for fraud to be committed:
• The perpetrator must have a motive why
he needs money or feels entitled to
defraud the organisation.
• There must be assets worth stealing
 Why fraud occurs
• There must be opportunity to remove the
assets, and to derive gain from them (eg
by selling them on)
• There must be failure of internal control or
fraud risk management.
We might therefore say that fraud occurs for
three main reasons:
 Why fraud occurs
• Because it represents an opportunity for
(illegitimate) financial gain.
• Because individuals or groups have low
morale and, or are actively hostile to the
organisation, enabling them to justify activity
to its determent.
• Because inadequate preventive and
detective controls are in place to discourage,
prevent and detect fraudulent behaviours.
 Problems Fraud Causes
• The removal of funds or assets obviously
poses a threat to the organisation in several
areas:
• Profits may be lower than anticipated,
• and the net assets position of the
organisation weakened.
• Stock levels may be lower than anticipated,
causing stock out or urgent (higher-cost)
replenishments
 Problems Fraud Causes
• Morale may suffer owing to climate of
suspicion
• significant reduction in working capital
• poor decision may be made, based on
inaccurate resource information
• Stakeholders such as suppliers may also
be subjected to risk
 Problems Fraud Causes
• If profits are understated, access to loan
finance may be restricted and
shareholders may be disappointed,
affecting the company’s share price.
END OF LECTURE SEVEN

QUESTIONS TIME