According to 2020 Report to the Nations, The Association of Certified Fraud Examiners (ACFE) estimated that the organisations lose up to 5% of revenue to fraud every year and corruption was the most common practice in every country. Reasons for employee in committing procurement fraud include perceived financial pressure, perceived opportunities and rationalization. Procurement fraud does not only result in financial loss but also tarnish the reputation of an organisation. It is crucial for the management to take action in combating procurement fraud before it imposes greater damage to the organisation. This article discusses the key factors to prevent frauds in the procurement function of an organisation.
Segregation of Duties
A key strategy of risk management and internal control is to separate duties. Empowering one person with complete control of a business process or an asset can pose greater risk to an organisation. To make the internal control effective, an adequate division of responsibilities among the individuals or departments who place orders, handle assets and those who authorise payment or accounting procedures should be in place.
This concept is to promote shared responsibilities of a critical process, and that no employee should perform more than two of the following functions:
- The custody of assets
- Authorisation or approval
- Recording or reporting
For instance, the person who issues purchase order should be different from the person who will be approving the purchase order. The person who authorises the payment should not be the person who approves the purchase of goods or services.
Regular Compliance Audits
Internal audit acts as a firewall to reduce the financial and reputational impact of fraud but also in preventing detriment to business objectives. Audits should be systematically planned in order to ensure all the procurement processes were carried out ethically and compliance with purchasing policies and procedures. This will be very helpful to ensure the organisation conforms to best practices and improves the operational efficiency.