Turning the screw on fraud

Source: supplymanagement.com

With an Ikea buyer locked up and a huge leap in financial crime, is the profession really alert to the risk from potential fraudsters? Andy Allen reports

It must have seemed like Christmas had come early for former Ikea buyer John Brown as he received kickbacks of more than £1 million to ensure he bought goods including crackers and candles from companies owned by one individual.

But the festive spirit quickly vanished when Brown was jailed along with Adam Hauxwell-Smith and Paul Hoult after admitting corruption and fraud charges last month (News). The case bears witness to what can happen when buyers give in to temptation.

Corporate fraud is a fast-growing problem for UK business, according to the 2007 Global Economic Crime Survey from PricewaterhouseCoopers (PwC). It says the annual cost of financial crime to the average organisation has jumped from £800,000 to £1.75 million in just two years. And one in 10 UK firms reported they had lost a business opportunity to a rival because of it.

These findings come hot on the heels of KPMG research earlier this year, which found that purchasers are responsible for 9 per cent of global fraud cases. But earlier this year an SM poll revealed that only 12 per cent of buyers believed fraud was a growing problem, compared to 50 per cent who did not (News, 24 May).

So are buyers too complacent about the possibility of financial crime within their organisations?

Yes, according to Andrew Gordon, partner in forensic services at PwC. He says most UK firms (not just their buyers) are in denial about the issue. He believes the growing complexity of IT systems, an increasingly mobile workforce and, above all, a globalised market are responsible for the increase in corruption. He adds that while only 17 per cent of the firms surveyed believed they would become victims of economic crime, nearly half had been victims in the past.

Yet Gordon is hesitant to apply the same charge to buyers that he applies to the wider business community. "Procurement is such an obvious area for fraud to take place that most companies have put restrictive controls around the area. To an extent, that will have cut down on fraud and forced it elsewhere," he says. His argument backs the view of many of the buyers polled by SM, who argued that the introduction of e-procurement and the view of purchasing as a way to generate savings meant greater scrutiny.

Richard Abbey, head of the London financial investigations group for risk consultants Kroll, agrees. He adds that because suppliers' margins have been squeezed it had reduced their ability to pay kickbacks. Recent research by Kroll indicates buyers may have a point. Whereas 49 per cent of companies felt their firm was at risk from procurement fraud, only a fifth fell victim to supply or purchasing deception.

So how might an organization recognise scams occurring in its procurement department? Signs might include transfers of money at unusual times or individuals reluctant to hand over or delegate responsibilities for a particular account to a colleague.

Procurement consultant Eric Evans points out that supplier collusion is only one kind of procurement fraud. Managers should, he says, also be alert to suppliers defrauding buyers by providing substandard stock or, more frequently, buyers blackmailing suppliers by threatening not to renew contracts.

Hitesh Patel, director of KPMG forensic, says that in times of economic slowdown and high levels of personal debt, organisations should be on their guard. "Procurement processes have been strengthened in recent years. But processes are managed by humans and human behaviour is driven by pressures," he says. "As companies scale back and rationalise operations it can drive people in procurement to cross the line."

Indeed, PwC's survey indicates that fear of losing a job was held responsible for nearly twice as many cases of fraud as in 2005. But the motivating factor is often more basic than that. As judge Patrick Eccles told Brown: "Your moral compass was broken by greed."