Poor procurement procedures and the associated risk of fraud in an organisation has been a problem faced by companies and organisations outside of New Zealand for many years. However, in recent times we have noted a significant increase in this type of fraud in New Zealand.

In our experience, we have found a high correlation between an organisation initiating a project to review its procurement procedures and the occurrence of a fraud. This is typically unfortunate as the loss suffered by an organisation may not be recoverable and could have been mitigated given the organisation had a programme to regularly review its procurement procedures and the systems in place to reduce the risk of fraud or error.

There are many ways that poor procurement procedures can increase the risk of fraud or error to an organisation. These include:

• Non-existent or ineffective systems regarding reviewing and accepting contracts through a tender process.

• Limited oversight of transactions or payments to suppliers that are close to or just under the delegated authority level of the authoriser.

• Journal entries processed in the organisation’s accounting system which have not been authorised properly or lack commercial reason and supporting documentation.

• Insufficient review of transactions for round sum amounts (i.e. $100,000).

• Systems where transactions are approved by an organisation with inadequate segregation of duties or no independent verification that the associated goods or services have been received by the organisation.

• The ability to create or change supplier information in the organisation’s systems which does not require a check by an independent person with sufficient authority.

• An increase in gift or entertainment expenditure incurred by an organisation which would appear unusual.

• Inadequate processes for ensuring that all conflicts of interest with suppliers are identified and dealt with appropriately. We note that this is not limited only to officers of the organisation, but also to persons in positions that are responsible for accepting, authorising and settling obligations on behalf of the organisation.

• Ineffective procedures regarding monitoring and examining differences in the profitability of projects between actual and budgeted amounts.

• Limited oversight on the impact of changes in the IT environment and how this interacts with the organisation’s procurement procedures.

• Delegated authority levels to enter into obligations or make payments on behalf of the organisation that are inappropriate or are not reviewed regularly.

Best practice indicates that an organisation should regularly review its procurement procedures to reduce the risk of fraud or error. We are encouraging all clients to establish a programme to review their procurement procedures.

A starting point could be to review the adequacy of the organisation’s current strategic approach, systems and controls that work together with the aim of reducing the risk of procurement fraud. Alternatively, an organisation may wish to establish a programme where independent tests are completed to receive real-time feedback on a periodic basis for any non-compliance with the organisation’s procurements procedures. We believe the key is being proactive with your approach so that an organisation can manage this risk.

Please contact your local Findex adviser if you would like more information or assistance on mitigating the risk of procurement to your organisation.