Fraud, Are You at Risk?

Fraud.  While we won’t suggest this wicked transgression is prevalent, it is pervasive across numerous dimensions.

A few examples?  Tax evasion, pyramid schemes, politico misbehavior, internet phishing, identity theft, and even misconduct within the supply chain. More specifically, the procurement component of an enterprise’s supply chain is arguably the most vulnerable since millions of dollars are at stake. Anybody or business may be susceptible… or even complicit. Even the recent Brexit (the British exit from the European Union (EU)) is undergoing a fraud investigation to remove thousands of signatures from the referendum.

Although fraud may occur within any component of the procurement process, several process steps are rife with opportunity.  The graphic below is a high level view of the procurement process, with the yellow highlighted boxes representing the components most exposed to fraud.

process chevron chevrons procurement


Collusion during the sourcing process may lead to price fixing. In this scenario, an employee may collude with two competing suppliers to fix a price of a commodity above what is considered fair value. The buyer may choose the “better” of the two inflated prices –both higher than fair value– and ultimately collect a kick back. Financially, the complicit suppliers benefit as well.

A more common type of front-end procurement fraud is an employee’s inappropriate acceptance of extravagant gifts, travel or entertainment in return for lucrative sourcing contracts. Widely considered bribery, this behavior results in sourcing non-competitively priced commodities.

Accounts Payable

Commodity quality collusion is another example. An employee may collude with a corrupt supplier to accept a lower quality or non-compliant commodity than was specified in the sourcing contract. For example, the sourcing contract may indicate a printer paper with a heavier weight and brighter sheen. Upon physical delivery of the commodity, the receiver knowingly accepts an inferior quality product in return for payment.

A further example of deception in back office processes may occur in supplier billing. A company may have contracted to purchase business envelopes at $.10 per item but the supplier bills $.11. Small, incremental overbilling of materials adds up quickly. Or a subcontractor may overstate billable hours worked.

Fraud detection

Certainly, countless enterprises are not subject to such egregious behavior.  For those intending to mitigate such practices, implementing data analytic techniques is a necessity to expose fraudulent conduct… or transaction errors.  Data analytics may prove to be a CPO’s handiest tool to avoid process abuse.

  • Price spike: Analytics uses purchase patterns to identify fraudulent acquisitions. Offenders may begin falsely billing in small amounts to determine if their illegitimate billings have been detected. Once they notice a sufficient number of these lower amounts are undetected –and paid- they up the ante with a “spike” purchase of a substantially larger amount, resulting in payment to the supplier.
  • Decimal error: Not necessarily fraud, a misplaced decimal error in a transaction might result in a significant, errant overpayment
  • Round dollar: Generally, transactions end in pennies, when considering costs plus taxes and fees.  A round dollar invoice is often considered an indicator of falsified invoices.

In each of these scenarios robust analytic techniques would recognize the errors and automatically alert appropriate individuals, thereby serving the dual benefits of saving cost and uncovering illicit activity.

At SDI, our portfolio of analytic tools and our technology-driven processes can help you manage indirect/tail-end spend effectively as well as mitigate fraudulent behavior.