Fraud in the Purchasing Department

The Association of Certified Fraud Examiners (ACFE) reported the results of a recent study that revealed the typical organization loses a median of five percent of revenues annually. The same study found that while both large and small companies fall victim to occupational fraud, companies with fewer than 100 employees are particularly vulnerable compared to their larger counterparts. Why is this? Essentially because larger companies have better internal controls and more likely to have anti-fraud practices in place - such as hotlines, employee fraud training and internal audit departments.

We regularly read the Justice Department's press releases on fighting crime - especially those that pertain to Government contracts. We do this because we like to figure out where the internal controls broke down and figure out what could have been done to prevent (or at least deter) fraudulent activity.

Recently, the Justice Department announced sentencing of a former employee of Honeywell (a large corporation, by the way) used a company card to purchase items and sell them on eBay. This wasn't a one-time deal - the employee did this for more than four years before being caught. The press release doesn't say how he was caught but it shouldn't have been too hard to uncover with some basic transaction testing.

The Government was interested in this case because the costs were passed along to the Department of Energy under cost-type contracts.

What is revealing from this press release was the statement: "... without the permission or knowledge of either Honeywell or the (Energy Department)." So Honeywell allowed this to go on for four years and never caught on. Why? Was it because they had this huge cost-type contract with little incentive to implement strong internal controls since they get reimbursed dollar for dollar anyway? Was it because they had this huge cost reimbursable contract but the Energy Department, who micro-manages its contracts anyway, didn't want to pay for added layers of internal controls?

The former employee, after paying full restitution, will now spend the next year in Federal prison.

You can read the entire Justice Department press release here.