Analyzing Corporate Fraud in Procurement Activities in Public Sector Organzisation

Inhaltsverzeichnis

ABSTRACT

Key Word: Analyzing Corporate Fraud in Procurement Activities in Public Sector Organization
1.0 Introduction
1.1 Background of the Study
1.2 Statement of the Problem
1.3 Hypothesis
1.4 Objective of the Study
1.5 Research Question
1.6 Significance of the Study
1.7 Scope of the Study
1.8 Limitation
1.9 Operational Definitions

LITERATURE REVIEW
2.0 Definition of Fraud
2.1 Common Areas of Fraud
2.2 Fraud Investigation — an Effective Response Plan
2.3 Fraud Prevention Process
2.3.1 Invoice and Payment
2.3.2 Payment Controls
2.3.3 Sales and Inventory Controls
2.3.4 Pre-Employment Screening
2.4 Pro-Active Fraud Detection
2.4.1 Collusion between Suppliers and top organizational/procurement officers
2.4.2 Suppliers Fitting Known Fraud Profiles
2.4.3 Questionable Transactions and Payments
2.5 Computer Based Evidence Recovery
2.5.1 The Forensic Image Process
2.5.2 Data Analysis
2.6 Definition of Procurement
2.7 Objectives of Procurement
2.8 The Role of Procurement in a Public Sector Organisation
2.9 The Procurement Circle
2.9.1 Originating
2.9.2 Selecting
2.9.3 Enquiry Procedures
2.9.4 Ordering
2.9.5 Completion

RESEARCH METHODOLOGY
3.0 Introduction
3.1 Research Methodology
3.2 Study Area
3.3 Research Design
3.4 Target Population
3.5 Sample Size and Sampling
3.6 Research Instruments
3.7 Date Collection
3.7.1 Questionnaire
3.7.2 Survey research
3.7.3 Interviews and Conversations
3.7.4 Sampling plan
3.8 Data Analysis
3.9 Limitation

DATA PRESENTATION & ANALYSIS
4.0 Introduction
4.1 Presentation and Analysis of Data
4.2 What Is Your Level Of Education?
4.3 What Is Your Grade In Your Organisation?
4.4 Do You Have a Procurement Department?
4.5 Qualification of Procurement Manager
4.6 Relationship of Procurement and Other Functional Units?
4.7 What Do You Think Of The Public Procurement Act, 2003 (Act 663)?
4.8 Do Officers Have The Requisite Competence Required To Prepare Standard Tender Documents?
4.9 Do You Have a Copy of The Following Legal Documents?
4.10 How Conversant Are You With The Procurement Act?
4.11 Does Your Entity Have Staff For The Preparation Of Tender Documents?
4.12 What Procurement System to Operate?
4.13 What Types Of Items Does The Procurement Department Purchase?
4.14 Which Procurement Method Does the Organization Normally Use?
4.15 Has There Been Any Corrupt Practices In The Procurement Activities
4.16 What Causes Corporate Fraud in Procurement Activities
4.17 Does the Management Have Measures to Check Fraud In the Organization
4.18 Can The Fraud Be Eliminate Completely In This Organization
4.19 What Solution Would You Suggest To Improve The Act?
4.20 Does Your Company Buys From Overseas?
4.21 How Is Payment for Procured Items Done
4.22 Has There Been An Occasion For Extension Of Deadline For Tender Submission?
4.23 Does Your Entity Conduct Public Tender Opening For Open Competitive Tendering?
4.24 Has There Been An Occasion For Extension Of Deadline For Tender Submission?
4.25 Researcher Conclusive Analysis One (1)
4.26. Researcher Conclusive Analysis Two (2)
4.27. Researcher Conclusive Analysis Three (3)

SUMMARY, CONCLUTION AND RECOMMENDATION
5.0 Summary of Research Findings
5.1 Conclusion
5.2 Recommendation

References

ABSTRACT

The existence of corporate fraud is an undeniable fact of business life, affecting businesses large and small. New technologies such as the internet, and the development of fully automated accounting systems have been increased this opportunities for fraud to be committed.

This research is designed to give readers a broad overview of fraud prevention, investigation and detection techniques. This technique when well implemented should provide any organization with an effective means of dealing with procurement fraud.

Key Word: Analyzing Corporate Fraud in Procurement Activities in Public Sector Organization

1.0 Introduction

This research is designed to give readers a broad overview of fraud prevention, investigation and detection techniques. Naturally, some techniques will be more relevant than others depending on the industry and company involved. These techniques when well implemented should provide any organization with an effective means of dealing with procurement fraud.

According to Trudeou (2009) in his book titled Deemed Fraud, defines fraud as a deliberate misrepresentation which causes another person to suffer damages, usually monetary losses.

Most people consider the act of lying to be fraudulent, but in a legal sense lying is only one small element of actual fraud. A salesman may lie about his name, eye color, place of birth and family, but as long as he remains truthful about the product he sells, he will not be found guilty of fraud.

There must be a deliberate misrepresentation of the product's condition and actual monetary damages must occur.

Procurement is a process of acquiring goods, works and services through legal means to an organization or individual as and when the need arise.

In other words it can also be defined as determining the organizational requirements, selecting the optimal source, establishing a fair and reasonable price and establishing or maintaining mutually beneficial relationship with the most desirable supplier to provide the conceptual back bone of the purchasing and supply function of which the best quality and price are most important factors Pooler (1996).

Existence of corporate fraud is an undeniable fact of business life, affecting businesses large and small. New technologies such as the Internet, and the development of fully automated accounting systems, have increased the opportunities for fraud to be committed.

Once suspected or discovered, investigating fraud is a specialist task requiring experience and technical skill. There is no doubt that fraud is best prevented, rather than dealt with after the fact.

Unfortunately, there is no foolproof method of preventing fraud, although there are a range of fraud prevention techniques which have been proven to be successful. Other techniques may be used to pro-actively test for fraud profiles, and to further investigate so that fraud incidents are satisfactorily resolved.

1.1 Background of the Study

The Public perception about fraud at the corporate level in the procurement activities in public sector organization prompted me to do this research and find a way of remedying the situation. In light of this National Vocational Training Institute (NVTI)

NVTI was set by an Act of parliament Act 351 of 1970 to provide vocational technical skills training for Ghanaians especially the youth.

By 1975 it operated four pilot training centres which were

1. Pilot training kokomlemle ACCRA.
2. Construction machinery training centre Burma camp ACCRA.
3. Vocational training centre Suame Kumasi and
4. Vocational training and Rehabilitation centre Biriwa,

Currently; NVTI has thirty –seven centres spread over ten regions of Ghana and is in the process of adopting one other training centre.

1.2 Statement of the Problem

Procurement has always been seen as a very simple activity which does not in any way need expertise before it is done. This is so because the contribution of procurement in attaining the strategic plans of organization is often underestimated. It is also not uncommon to see other staff especially accounting officers handling procurement in reputable organizations. What is not realized is that procurement has a stake in cost reduction and consequently efficiency in production. Even in the 21st century, some organizations are still not keeping abreast with practices in the procurement fraternity.

This study is therefore seeks to bring to the fore some of the ways that procurement could help eliminate corporate fraud in organizations with reference to the National Vocational Training Institute (NVTI).

1.3 Hypothesis

The study seeks to disapprove the assertion that corporate fraud in procurement in public sector Organizations in Ghana cannot be mitigated or eliminated.

1.4 Objective of the Study

1. To a way of conducting a fraud risk analysis of procurement processes in public sector organizations.
2. To identify solution to fraud risks in areas of procurement operation.
3. Sustain and improve on an existing combination of fraud control and security procedures to combat most determined and skilled professional fraudster.
4. To access the commitment level of the procurement professionals in NVTI.
5. To find out how this professionals are motivated in NVTI.

1.5 Research Question

1. How would you consider the relationship between purchasing function to other functions such as stores, testing and finance?
2. Does your institution have centralized purchasing department?
3. What courses corporate fraud in procurement activities?
4. What solution would you suggest to improve the act?
5. What is the qualification of your procurement manager?
6. Do you suspect any fraud play in the procurement and supplier relationship?
7. Have there been any corrupt practices in the procurement activities?
8. Have you even seen a supplier submitting double invoice for payment?
9. Does your organization use the procurement act, act663, 2003?
10. How is payment for procured items done?
11. Can the fraud be eliminated completely in this organization when good measures are put in place?
12. What can be done to eschew such fraud?

1.6 Significance of the Study

1. The study also deals with the corporate fraud: prevention, detection and investigation
2. The significance of the study is to bring to light the role of procurement function towards the formulation band implementation of organizational strategies
3. The study will also be a source of reference to National Vocational Training Institute in particular and the public sector organization as a whole

1.7 Scope of the Study

The study deals with the corporate fraud: prevention, detection and investigation.

Although the topic stipulates the fraud amongst corporate members, The researcher also sought the view of every individual in that NVTI as to how he or she can help check and eliminate it.

1.8 Limitation

1. One of the major challenges encountered in the writing of the project
2. Work was the acquisition of information needed from personnel of the NVTI.
3. Some of the respondents did not have time to give the researcher the information needed.
4. In some cases, those who were given the questionnaire to fill fail to so, as a result of busy schedule and some officers were not ready to offer assistance of any kind because they feared they might divulge secrets of the institution.
5. Some questionnaires were filled very late which made it difficult for the researcher to fully cover the topic in the write up.
6. Finally, the time constrained in acquiring information for the project work alongside academic work were also herculean task for the researcher to overcome.

1.9 Operational Definitions

1. Fraud: is an intentional deception made for personal gain or to damage another individual
2. Order: is a document communicating specification, control and instructions to the vendor to supply materials on terms and conditions specified or named at the specified price
3. Pre- Employment screening: if an organization is not ready to outsource it procurement activities due to its operational level, than a proper pre-employment screening must be done.
4. Data Analysis: This occurs when a computer forensic technician examine the entire structure of a hard disk, looking to correct all possible evidences
5. File Slack: This refers to the parts of space reserved for use by a file that has not been completely filled by that file. This information consists of data pulled from the computer’s memory and to “pad’’ the file to the required length
6. Data fragments; It is unit of disk space that is in use yet are not accounted for by files on the disk
7. System Slack; It is a data written to areas of hard drive reserve for use by the computers operating system.

LITERATURE REVIEW

2.0 Definition of Fraud

In the broadest sense, a fraud is an intentional deception made for personal gain or to damage another individual; the related adjective is fraudulent.

The specific legal definition varies. Fraud is a crime, and also a civil law violation. Defrauding people or entities of money or valuables is a common purpose of fraud, but there have also been fraudulent "discoveries", e.g. in science, to gain prestige rather than immediate monetary gain. A hoax also involves deception, but without the intention of gain, or of damaging or depriving the victim; the intention is often humorous, (Ramage and Williams, 2009).

Purchasing is a function that is particularly vulnerable to fraud. Purchasing and expense-related fraud is probably the most common fraud encountered, and is likely to affect the majority of small to medium sized businesses at some stage. The opportunities for fraud in purchasing are high, as this is one of the main areas where funds “leave” a business or an organization. Evans Donald (2005) in his book, Fraud and Deceit in Science, states that ‘fraud is not necessarily restricted to those with the title purchasing officer but may involve anyone in direct contact with suppliers’, including engineers, works managers, sales and computer staff. Evans also points out that ‘what appear to be fraud may, on occasion, be no more than incompetence.

In any organisation staff can only be expected to comply with policy if it is clearly set out in a comprehensive document which details procedures to be followed.

Where no such policy document exists, it is often difficult to prove that employees or external parties have knowingly acted against the interests of the organisation.

Indeed the lack of clear guidelines is often the first excuse which “offenders” will use - “I didn’t see anything wrong in accepting a free holiday - nobody said it was against company rules” is an example of an actual defense forwarded by a buyer who received such a bribe from a vendor.

Below are some supplies-related frauds;

Buyer/supplier collusion leading to approval for payment of fictitious charges.

Presentation of false invoices – typically the offender will set up a fictitious company with Impressive stationery and invoice to the purchaser for goods not supplied.

Re-presentation of genuine invoices that have not been cancelled at the time the cheque was signed for second payment.

Abstraction of tenders or arranging for the lowest tender to come from a desired source Omission of credit notes for goods returned to the supplier.

Premature scrapping of assets in return for a ‘kickback’ from a scrap dealer.

Computer-based frauds which take advantages of inadequate controls or limited understanding of computers on the part of senior management.

2.1 Common Areas of Fraud

Few competent managers would doubt that fraud is a significant potential problem for their organisations. Newspapers are full of reports, editorials and surveys which suggest fraud is commonplace, easy to commit and unlikely to be detected. Identifying high fraud risk areas in an organisation is the first step in dealing with the problem of fraud.

These risk areas can vary from industry to industry and company to company. Some of the more common risk areas are outlined below:

a. Accounts Payable — Purchasing and expense-related fraud is probably the most common fraud encountered, and is likely to affect the majority of small to medium sized businesses at some stage. The opportunities for fraud in purchasing are high, as this is one of the main areas where funds “leave” a business. Fraudulent transactions can be easily concealed in these outwards flows, in the purchase of material and assets, and the payment of expenses.

b. Sales and Accounts Receivable — the most commonly encountered frauds here involve discounting and credit. Excessive discounting in return for “kickbacks” is relatively common similarly millions are lost from organisations through bad credit obtained fraudulently, often through the corruption of a sales or credit employee.

c. Cash and Cheques — Control procedures are usually in place in regard to cash, yet they are often ignored where cheques are concerned. Cheque theft and resulting fraud, though usually on a “small” scale, is surprisingly commonplace. Larger scale frauds can occur where bank reconciliations are weak and separation of duties is not performed.

d. Physical/Access Security — Physical controls over access to potentially sensitive areas such as cash management, inventory storage, and accounts payable are rarely as strong as they should be in many organisations. This can lead to large scale, organised fraud resulting from the theft of treasury payment instructions, passwords, sensitive corporate information and company assets.

e. Corporate and Personnel Policies — Most company policies in respect of fraud control, confidentiality, information security, personnel screening, etc. remain inadequate

2.2 Fraud Investigation — an Effective Response Plan

It is important to remember that when fraud is first suspected the matter is likely to be more serious than it may initially appear. This is because fraudsters rarely restrict their activities to only one area, and therefore every effort should be made to obtain as much information as possible before anyone is challenged or confronted. This is particularly important in organizations, where the temptation to simply question an employee as soon as a suspicion is raised is strong due to the close working environment.

It is also important to be aware that larger scale frauds of the modern era are often international in nature. Therefore any contingency planning must include measures for taking legal and investigative action across jurisdictions. Initial actions are crucial to the eventual outcome and, if a proper strategy is put in place and adhered to, then the extent of fraudulent activity can usually be assessed and action taken to resolve the matter successfully (this usually means assimilating sufficient evidence to dismiss errant staff and to take civil and/or criminal proceedings against those concerned in the fraud if so desired). Conversely, the wrong actions at this early stage can lead to a botched investigation, destruction of evidence, financial loss and possibly, action against the individual or the company.

The following should be considered as a guide to the actions which should be considered in cases where suspicion arises:

Stage 1

Continue as normal, giving no indication that you are suspicious; initiate a covert investigation using internal investigators or external specialists. Together with the selected investigators, devise a strategy for the investigation .list all reasons for suspicion; keep a detailed log of all actions and events from the moment of first suspicion onwards; and only advise/involve those who absolutely need to know.

Stage 2

The investigation strategy may include: out of hours search of suspect’s desk/office/work area; full background searches of suspect companies and individuals using public databases and so on, detailed analysis of transactions, documents and files - “forensic accounting”; analysis of calls made from office telephone and fax lines of suspect to identify non business related calls and document forensics. Leads obtained from the above actions will then be further investigated to develop all available evidence. In most cases, until the above actions are completed, YOU SHOULD NOT: suspend or dismiss any suspect question any suspect or witness make any unsubstantiated accusations or take any other action which is likely to compromise the covert investigation.

2.3 Fraud Prevention Process

In any organization, procurement staff can only be expected to comply with policy if it is clearly set out in a comprehensive document which details procedures to be followed. Where no such policy document exists, it is often difficult to prove that employees or external parties have knowingly acted against the interests of the organization.

Indeed the lack of clear guidelines is often the first excuse which “offenders” will use “I didn’t see anything wrong in accepting a free holiday - nobody said it was against company rules” is an example of an actual defense forwarded by a buyer who received such a bribe from a vendor. A comprehensive policy document should be prepared and made available to all employees, who should be asked to sign a declaration that they have read and understood the policy requirements. The document should spell out general policy in regard to: acceptance of gifts and entertaining conflicts of interest criminal and/or civil redress against personnel breaching the policy guidelines.

The policy document should also set out the consequences of fraudulent action and/or withholding information concerning any such action. It is also desirable that regulations relating to specific areas of the organization’s work should be set out for the benefit of staff working in these areas.

Another significant non-identification factor to consider for any proposed solution is the intricacy of integration. For any solution to be successful, it must be cost effective. Ideally, the solution should be compatible with existing systems and it must be capable of being applied by existing staff. However, if the solution is not readily compatible with existing resources, the cost of application must be balanced against the particular need for positive identification.

2.3.1 Invoice and Payment

The normal terms on which organizations trade are that the supplier posts an invoice for the goods dated the same day as they are dispatched, and allows the customer a month or more to pay. Large quantities of invoices may arrive everyday. They have to be sorted, checked and approved for payment quickly so that payment can make within the allowed time.

The account department usually does this clerical work. Some firms prefers it to be done in the purchase department since the records required are available there and since it is the purchase department which take sup any queries with sellers.

2.3.2 Payment Controls

Fraud in purchasing and procurement has seen an unprecedented increase in the last few years. Whatever the reasons behind this trend it is vital that organizations are adequately protected against this type of fraud which can result in substantial additional costs to the organisation. Purchasing fraud frequently involves the payment of “kickbacks” or bribes, which are paid to decision makers within the purchasing organisation in exchange for the award of supply contracts. Fraudulent purchasing schemes can be sophisticated and difficult to detect. Such schemes can operate for years before they are discovered. An important point to remember is that the payment of a kickback represents a cost to a supplier. In most cases, the supplier will seek to recover that cost, usually through undersupply, inferior product, or over invoicing. In nearly every case, the benefit to the supplier (and the cost to the purchaser) far outweighs the value of the kickback.

There are a number of ways in which an organization can protect itself against procurement fraud. Practices recommended are as follows: pre-qualification of prospective vendors (“due diligence”); ensure suppliers and staff is fully aware of company policies in regard to gifts and entertaining, and conflicts of interest;ensure proper levels of demand control to avoid unnecessary over ordering of stocks, consumables and so on; establish clear purchasing authorization levels; all invitations to tender on contracts should carry a declaration that the company is committed to the prevention of fraud, together with a Hotline number through which any prospective supplier or individual can report suspicions of fraud; copies of invitations to tender should be filed for future inspection to ensure that specifications are identical and that no company is given a more difficult specification to cause them not to bid or to submit a higher bid than it otherwise would; all contract documents should carry a right to audit clause which will facilitate an in-depth audit of the supplier’s records should evidence of corruption come to light; and strict controls should be applied to supplier master file data including procedures to monitor dormant suppliers and to prevent illicit alterations to master file data. It is also good practice to carry out periodic checks to ensure that invoices are from genuine companies, and not from shelf companies operating from “serviced office” addresses or invoices printed simply to facilitate payment against non existent supplies of goods or services.

2.3.3 Sales and Inventory Controls

Sales and inventory frauds are often closely related. Such frauds will usually involve the following: Excessive discounting for the supply of goods and services; Theft of warehoused stock or diversion of stock in transit; uninvoiced sales; unauthorized award of credit notes; and Fraudulently obtained credit.

Strengthening controls in sales and inventory to prevent the frauds described above will usually involve a greater degree of enforcement of security standards, Warehouses should always be maintained under strict security and surveillance; no stock should be permitted to leave a warehouse without appropriate checks that the stock ordered matches the stock being removed. Credit notes should be awarded only after sign off by senior management unconnected with the sales process. Discounts should be monitored regularly using auditing programs, and discount levels should be set and maintained by non-sales management. Sales and inventory controls would appear to be common sense, yet many frauds occur in this area because controls are ignored or not enforced. This is particularly the case in organizations with a strong “sales at any cost” culture.

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