How Good Are Your Purchasing System Internal Controls?

When companies first start out, the entrepreneur/founder does just about everything him/herself - engineering, manufacturing, purchasing, estimating, accounting, billing, and on and on. As the company grows, specialists are hired to take over these functions. As a sole proprietor, internal controls are not critical. But as employees are added and systems become more complex and vulnerable to fraud, internal controls become absolutely necessary.  Purchasing is a system that is highly vulnerable to fraud. Purchasing agents have a lot of opportunity and methods in which they can enrich themselves at the expense of the employer (e.g. the Government contractor) and ultimately the Government. All you need to do is peruse the DoJ's press releases to find dozens, perhaps hundreds of incidences involving procurement fraud by Government and contractor employees alike.

So one would think that a company like Boeing would have internal controls that would be impervious to procurement fraud. After all, their business systems are considered the gold standard for Government contractors, they are publicly held and responsible to stockholders and they are subject to all of the internal control requirements of the Sarbanes-Oxley Act. They probably have enough policies and procedures to fill a semi truck trailer.

But Boeing is not immune to fraud committed by employees and neither are you. Last Monday, a Federal grand jury in St. Louis indicted a Boeing procurement office on charges he gave inside information to a Washington state shop owner and others, netting the subcontractors more than $3.5 million in orders for aircraft parts. In this case, the Boeing employee gave the shop owner information about the competitors bids and also, historical price information in exchange for cash.

According to the indictment, the shop owner used the information from Boeing to prepare and submit bids to Boeing on behalf of his company. Ultimately, the shop was awarded seven purchase orders totaling $2 million. The Boeing employee also perpetrated his scheme with other suppliers.

FBI raided the shop owner's facility in Washington last May and hauled away lots of records. At that time, FBI refused to discuss what they were up to. Now we know.

The shop owner also appeared on a Bank of America promotional video in which he and employees talked about how the business grew with help from the bank. That video, which has since been taken down from Bank of America's website, included the following quote:

I just got into this trade without a formal business background. High school had a metal shop. It was a great place to fix my dirt bike. Couldn't afford to really go buy parts all the time. And this led to a job in a machine shop. Twenty-five years or so, it kind of just flies by, and here you are.

We guess he should have also mentioned the help he got by bribing Boeing purchasing agents for the company's growth.

So, how effective are your internal controls over purchasing?