Watch for these types of purchasing fraud

Purchasing is one of the top 6 departments where fraud is most likely to occur according to the Association of Certified Fraud Examiners (ACFE). It accounted for 6% of the cases in the 2012 ACFE Report to the Nations on Occupational Fraud and Abuse. The median loss for fraud committed by Purchasing departments was $200,000 per organization, a loss amount exceeded only by Finance departments, executives, and board members. Corruption often happens in the Purchasing departments in the form of conflicts of interest, bribery, and illegal gratuities.

The top red flags for purchasing schemes are:

• Presenting an unusually close association with a vendor or customer (often exemplified by lunches, dinners, tickets to concerts and sporting events, vehicles, etc.)

• Exhibiting control issues, such as an unwillingness to share duties (sometimes combined with defensiveness and irritability). This red flag is the way thieves will prevent people from scrutinizing their work.
• Living beyond means
• Having financial difficulties

Most often fraud schemes in the purchasing arena fall into one of four categories:

1. Fictitious Vendor schemes involve setting up a vendor that doesn’t exist, then processing invoices to the vendor. Often the vendor name is similar to a legitimate vendor or a new vendor is set up using the acronym of a legitimate vendor (eg, Big City Plumbing, Inc. becomes BCPI).

2. Vendor Kickbacks cost your organization because you’ll pay higher prices for goods and services you need or end up paying for things you don’t need. Salespeople can be so generous! Of course, they can because it doesn’t cost them a dime.

3. Conflicts of Interest occur when a purchaser channels business to a company in which he, his family, or his friends have a financial interest.

4. Bid Rigging is common on large projects and involves the promise to award a contract to one party even though it should be determined by a call for bids. Validate the bid document (sometimes called a "request for proposal”) for unnecessarily restrictive requirements that effectively channel a bid to a specific vendor.

To further illustrate the types of fraud schemes that can be used to steal from your organizations, read this recent case: 

Thomas Nelson was the director of a private social services organization that provides heating assistance, transportation, early childhood education, and other programs for low-income residents in York County, Maine. He stole close to $1 million in the final seven years of his 21-year tenure.

Nelson used two primary schemes to transfer the organization’s funds for his own use. He paid $413,000 to a consulting company that had issued one invoice for only $8,700 over a six-year period. The consulting company paid Nelson’s personal expenses and provided cash kickbacks to him.

Nelson obtained another $400,000 by setting up a vendor that was actually a defunct non-profit entity for which he had served as treasurer. He recorded the payments to them as donations or consulting fees and then used the funds to pay off personal credit cards and gamble.

Nelson, 56 years old, pleaded guilty in August 2012 to ten felony counts. He agreed to pay $1.2 million in restitution as part of his plea agreement, as well as $150,000 to the Internal Revenue Service.

This case fits the profile of a typical embezzlement. The perpetrator was secretly gambling and also might have been living beyond his $90,000 annual salary. The fraud was perpetrated by a long-term, trusted employee with access to assets, who could conceal his misdeeds for years because he understood the organization and its vulnerabilities.

Knowing the types of purchase fraud employees commit to separate money from your organization is a critical first step to prevent a huge loss.

Denise McClure brings over 20 years of experience in public accounting, business management and non-profit board involvement to her work as a Certified Public Accountant (CPA) and Certified Fraud Examiner (CFE). Her business, Averti Fraud Solutions helps businesses and non-profit organizations become more profitable, secure and efficient by creating accountable and transparent work environments.



Tags: non profit, board members, small business, payroll fraud

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