Tuesday, November 18, 2014

Purchasing Systems and Their High Propensity for Fraud

According to the 2014 Association for Financial Professionals Payments Fraud and Control Survey, a staggering 60 percent of businesses were exposed to actual or attempted payments fraud in 2013. The typical fraud-related loss experienced by businesses was $23 thousand. Ten percent of businesses recovered the full amount of money defrauded from them. Thirty percent of those impacted by fraud recovered nothing.

Not surprisingly, small businesses are more susceptible to fraud than larger firms. Many small businesses do not have internal control systems, they're disorganized, they do not perform business fundamentals like reconciling checkbooks regularly, and they put a lot of trust in their employees.

There are many ways to defraud. If the fraud is the accounts receivable clerk kiting checks, the resolution is between the clerk, the company, and perhaps local law enforcement. But woe to the company where the impact of fraud is passed along to the Government through a contract or grant. That company will feel the immense weight of the Government investigative and judicial juggernaut as they pursue prosecution and/or settlement.

Consider the Department of Justice press release from yesterday. Sevenson was a company founded in 1917 by one man. The company was passed on in the 1940s to the man's sons and from the sons to the grandsons in the 1970s. Here was a nearly 100 year old environmental remediation company that became quite successful by any standard - except for one detail. They had some employees who exploited weak internal controls.

These employees accepted kickbacks, rigged bids, and passed inflated charges to the Government. The DOJ press release stated that the employees accepted more than $1.6 million in kickbacks from six companies in exchange for the award of subcontracts for work at a EPA clean-up site. Then, those employees conspired with the subcontractors to pass the majority of those kickbacks to the EPA through inflated charges.

Obviously, this kind of fraud is perpetrated through a contractor's purchasing system and that is one reason why the adequate purchasing system are so important to the Government (e.g. DCMA performs periodic Contractor Purchasing Reviews (CPSR) at larger contractors). Internal controls can be devised to prevent fraud. Contractors should implement sound policies, procedures, and practices before its too late.

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