Combating collusion - KordaMentha€¦ · The procurement and accounts payable officers set up a...
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May 2016 Publication No. 16-04 Combating collusion
Transcript of Combating collusion - KordaMentha€¦ · The procurement and accounts payable officers set up a...
May 2016Publication No. 16-04
Combating collusion
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2 3 4External
Internal
When someone is asked to describe ‘collusion’, a typical response may involve a scenario where firms are working together to fix the price of a product across a market. But the risk of collusion internally or with suppliers should be on the radar for every business.
The 2016 Report to the Nations of the Association of Certified Fraud Examiners (‘ACFE’) shows that collusion occurs almost as frequently as fraud is committed by a single employee; and that, on average, the more people involved, the bigger the financial loss.
The good news? While collusion is a real risk, there are things that you can do to help prevent or detect it. There are some solutions that are relatively easy and cost-effective.
Collusion is a secret agreement or cooperation between parties for illegal or deceitful purpose. It can come in different forms, including bribery and corruption, or fraud. The risks to an organisation can originate from internal or external sources, or a combination of both.
Here are two simplistic examples showing how external and internal parties can collude to defraud an organisation.
Introduction
What is collusion?
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Agreement between procurement officer and
a supplier.
The procurement and accounts
payable officers set up a fictitious
company and forward fictitious
invoices.
Procurement officer approves
fictitious company as a supplier, and accounts payable
officer approves the fictitious invoices.
Payment is made from organisation to fictitious company.
Monies are split between the
procurement and accounts payable
officers.
No goods are received.
Fraudulent accounting treatment
undertaken to account for the
loss.
Supplier offers ‘special commission’ to be paid to
procurement staff personally if a contract is awarded.
Prices are inflated. Goods are received.
Procurement Supplier
$$$$$ $$ $$$
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The story of Dr Esra Ogru1 is a real-life example of collusion.
Dr Ogru was the co-CEO of an Australian biotech company. She colluded with two colleagues to defraud her employer of more than $6.1 million between 2004 and 2013. This was done through false invoicing and credit card reimbursements.
Dr Ogru and her colleagues were in positions of authority which allowed them to approve false invoices from entities that they controlled. As co-CEO, Dr Ogru knew the amount to invoice without raising suspicion and was able to approve the invoices. The money received was then divided between the three individuals.
The scheme was finally detected by the CFO who started questioning invoices from one of the entities. Her concerns were raised with the audit committee and investigations were conducted.
When the case ended, the other co-CEO acknowledged that “the company’s internal checks and balances should have been better.”2
ACFE’s 2016 Report to the Nations shows that:
• Nearly half of reported fraud cases involve collusion.
• As the number of people involved gets higher, so does the average loss.
• When the number of perpetrators increases from just one to two, the average loss rises nearly two-fold.
• When the number of people increase from four to five (or more), the average loss rises by more than two fold.
• More cases involve five or more people than either three or four people.
Real-life collusion
How serious is collusion?
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Source: ACFE Report to the Nations 2016
$700,000
$600,000
$500,000
$400,000
$300,000
$200,000
$100,000
$-
60%
50%
40%
30%
20%
10%
0%
52.9%
17.4%
10.6%
5.4%
13.7%
One person
Median loss (left-hand scale)
Impact of collusion
Frequency (right-hand scale)
Two people Three people Four people Five or more people
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Relevant to procurement, there are two approaches: preventive and detective, as set out below:
What can you do to combat procurement collusion?5
Preventive
Detective
1. Review your procurement policies: a. Do your current procurement policies allow for additions to the supplier list without approval?
Who is authorised to add suppliers? Are any checks performed on suppliers? Is the person approving payments the same person who previously approved suppliers?
b. Do you have tender requirements? How stringent are they? Selective tendering can focus attention on suppliers that have the greatest financial impact, whilst allowing more streamlined procedures for low-value suppliers.
2. Conduct due diligence on suppliersa. During the tender process, be specific as to what kind of supplier you need. Ask yourself:
i. Is a supplier priced competitively in the market, and if not, why not? ii. Is a low-tier supplier charging the same price as a top-tier one?iii. Is the supplier well established in the market? Who else are their customers? Do they
have a track record?b. Conduct a background check on owners of the company and its registered address. The
background check will identify the directors and shareholders of the supplier. Similarly, conduct background checks on the referring party, and follow up any identified relationships between the referrer and the supplier. Surprisingly, employees who establish fake companies often use their own address or bank details
3. Rotation of procurement managers and/or contact personnel:a. Have your employees been the primary contact with the supplier for long periods? Do your
employees have the skills needed to choose between suppliers? b. Consider rotating employees between departments:
i. The likelihood of identifying potential collusion increasesii. Awareness of rotation may lower the likelihood of collusioniii. Employees will develop new skill-sets.
1. Rotation of suppliers:a. Analyse your accounts payable system:
i. Are some suppliers being paid more than other suppliers for similar products or services?
ii. Are certain suppliers being engaged more than other suppliers?b. Consider having different suppliers of similar services available, and rotate them from project
to project.2. Have an internal or external expert review your supplier data for:
a. Patterns in supplier use. Is one supplier being paid more than others? Are they being used more often? Does one supplier only ever get used by one or few procurement staff? When was the last time you engaged a different supplier?
b. The accuracy of supplier data. Some companies think a good control is to require an ABN for each supplier, but have you ever checked that it’s the correct ABN?
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About the author
Endnotes1. See: http://www.austlii.edu.au/cgi-bin/sinodisp/au/cases/vic/VCC/2014/2015
See: http://asic.gov.au/about-asic/media-centre/find-a-media-release/2014-releases/14-296mr-former-ceo-and-two-melbourne-men-jailed-following-theft-of-millions-from-phosphagenics-limited/ See: http://www.brw.com.au/p/leadership/the_tale_of_esra_ogru_high_flyer_JDF3sYnwwdzUhZ6d8bXKVN
2. http://www.theaustralian.com.au/news/health-science/esra-ogru-scientist-saleswoman-and-majorleague-scammer/news-story/5994c09b58ba91bcdcd29ec8ccfb3ee6
Matthew John Lim | ManagerSydney | +61 2 8257 3048 | [email protected]
Matthew is a Manager with the KordaMentha forensic team in Sydney and has been involved in many projects for large multi-national corporations for six years across Asia Pacific and Europe. Some of Matthew’s projects involved investigations into financial fraud and corruption, conducting fraud risk reviews, conducting due diligence projects, and investigations into bullying and harassments. His industry experience includes the financial services sector, oil and gas, telecommunications, government and international shipping. Matthew has a Masters Degree in Criminology.
The repercussions of collusion can be significant, not only to a business’s operations, but also to its reputation. Tightening internal controls will mitigate the possibility of collusion.
An employee guilty of collusion is typically in a position of trust or authority, which helps in defrauding the employer. The steps outlined above can be implemented without undermining that trust, but reduce the risk and impact of collusion.
In our experience, no single policy or control works in every organisation, but the principles are universal.
Further reading:
Integrity Due Diligence: the known unknowns and the unknown unknowns by David Lehmann
A risk-based approach: how due diligence can mitigate fraud being committed in your organisation by Ben Mahler
Conclusion6
In the examples set out earlier, the risk of collusion could have been reduced:
• The external collusion scenario – by conducting a strict tender review process or due diligence on the supplier.
• The internal collusion scenario – by conducting due diligence on the suppliers, with a review committee approving new suppliers.
• The real-life example of Dr Ogru – by conducting a due diligence on the suppliers recorded and stringent regular checks on supplier invoices and employee credit card claims.
This publication, and the information contained therein, is prepared by KordaMentha Forensic Partners and staff. It is of a general nature and is not intended to address the circumstances of any particular individual or entity. It does not constitute advice, legal or otherwise, and should not be relied on as such. Professional advice should be sought prior to actions being taken on any of the information. The authors note that much of the material presented was originally prepared by others and this publication provides a summary of that material and the personal opinions of the authors.
Limited liability under a scheme approved under Professional Standards Legislation.
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