6 minute read 11 Apr 2022
Procurement frauds

How emerging technologies are helping tackle procurement frauds

Authors
Arpinder Singh

EY Global Markets and India Leader, Forensic & Integrity Services

Leading forensic accountant and veteran expert witness. Advising global clients on compliance, anti-corruption and corporate governance. Disruptive thinker. Technology aficionado. Author.

Harshavardhan Godugula

EY India Forensic & Integrity Services Technology & Innovation Leader

Technology leader. Advising the C-suite on building safer enterprises through cyber incident response, data governance, fraud analytics and eDiscovery services. Driven by innovation.

6 minute read 11 Apr 2022
Related topics Forensics Data and decision intelligence AI Technology Digital
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  • COVID-19: unravelling fraud and corruption risks in the new normal

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Technology is emerging as an antidote to fraudulent practices affecting businesses.

In brief

  • The disruption and threats posed by the pandemic has companies facing heightened challenges and risks.
  • Rising procurement frauds risks such as conflict of interest, inflated invoices, inferior quality, can potentially lead to significant losses for companies.
  • Emerging technologies such as Artificial Intelligence (AI), data analysis, continuous monitoring, robotics process automation (RPA) and blockchain can help detect and mitigate procurement frauds.

The pandemic led to many changes in the way businesses operate. Over the past two years, from business models to sourcing and procurement processes, and even investigation methods, had to be reinvented to keep up with the demands of these changing times. With the virus at large and social distancing an effective way to tackle it, businesses transitioned to remote or virtual working environments. While these working models and increased online transactions helped flatten the curve to some extent, they also led to concerns such as operational monitoring, procurement malpractices and rising ransomware attacks This unprecedented situation also raised questions on the integrity of third parties, employees as well as other stakeholders involved. Hence, many companies turned to technology to mitigate fraudulent activities, including procurement fraud risks and maintain the sanctity of their business operations.

Understanding procurement frauds

According to the Association of Certified Fraud Examiners (ACFE), businesses lose up to 5% of their revenue, amounting to $3.7 trillion worldwide to fraud each year.

Procurement frauds take place while obtaining goods or services for business purposes. The most common frauds in this scenario involve a tradeoff, either in cash or kind, in exchange for a favor. To give an example, a vendor may be issued a contract at a significantly higher price than the market price, and the procurement manager is compensated in cash, material items, or other ways for awarding the contract. Procurement malpractices are usually perpetrated by contractors, third party sub-contractors, and, at times, might also involve inhouse staff. These can occur during different phases of the procurement process such as initiation, delivery, payment of goods.

Companies, especially ones that operate in emerging markets, can see revenue losses if the strong detection and deterrence measures are not adopted. Leveraging technologies such as forensics analytics, AI, cyber forensics, RPA and blockchain in processes can be vital in helping curb frauds.
Arpinder Singh
EY Global Markets and India Leader, Forensic & Integrity Services

The repercussions of the pandemic have led to a new normal state where frauds due to bribery, corruption, third parties and employee misconduct have magnified.

EY Forensics report on reshaping the future of compliance

Procurement frauds most commonly occur due to corrupt practices. Corruption can be detrimental to the functioning of any organization and can be especially harmful to small enterprises. Rather than an isolated operation, corruption is typically perceived as a group effort. Bribery, conflict of interest, and extortion are some of the corrupt practices that are plaguing businesses.

It is imperative for companies to understand procurement fraud red flags and various methods fraudsters use to cover up their misdeeds, for only then will they be able to detect and nip these frauds in the bud. Some of the methods fraudsters use to perpetrate procurement frauds include:

  1. Creating fraudulent physical or electronic documents
  2. Altering existing physical or electronic documents
  3. Manipulating the bid documents such as technical specifications, and financial parameters

Role of technology in mitigating procurement fraud risks

Fraud detection is key to an investigation because the speed to detect a crime, as well as the method to detect it, can have a substantial impact on the size of the fraud. However, with the volume, variety, and velocity of data exploding right now, procurement teams alone may get overwhelmed trying to keep a check.

New technologies can be integrated deeply within a company’s overall compliance and risk framework to mitigate procurement fraud risks. While these methods cannot guarantee the detection and prevention of a fraudulent activity, management's commitment to and investment in fraud prevention and detection procedures can identify procurement fraud red flags as well as send a strong message to employees, vendors, customers, and others about the company's stance on integrity.

How EY can help

EY Virtual Ethics and Compliance Manager

EY Virtual Ethics and Compliance Manager helps compliance, ethics and investigation functions accelerate their digitization journey and transform business operations by adopting a managed services approach.

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Forensic & Integrity Service Offerings

Helping organizations achieve their integrity agenda.

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Emerging technologies can be implemented in several areas to make procurement processes robust. Some of these include:

  • AI: Asset misappropriation frauds, such as collusion to drive up prices can be minimized with AI. An AI based verification system that estimates the cost of goods and services, if deployed, can make procurement prices more competitive.
  • Analytics: Techniques such as topic modelling, linguistic analysis, statistical analysis, and rule based descriptive tests are becoming increasingly sophisticated to handle high data velocities with the aim to spot procurement fraud red flags or improper payments much earlier in procure-to-pay processes (P2P). Analytics can also be used to check for bid rigging, duplicate invoices, travel expenses, returns, fidelity cards, subscriptions, and more, depending on the industry and the needs of the organization.
  • Behavioural analytics and social network analysis: Continuous monitoring of costs related to gifts, hotels, venues, events, and hosting can tackle bribery and corruption. Its core components, Behavioural analytics and social network analysis, are increasingly aiding detection of anomalous activity patterns and hidden links, as well as predicting chances of procurement malpractices.

Data mining can be utilized to find procurement fraud red flags, colluding tendencies, and fake information, while data visualization further helps to detect 'corrupt intent' in payments or transactions.

Other benefits of technology include the automation of processes through RPA, which can greatly reduce the human element in procurement activities, thereby combatting the many ways fraudsters use to hide frauds and procurement malpractices.

How EY can help

Forensic data analytics

Forensic Data Analytics (FDA) is a critical element of nearly every way in which we support organizations — whether an investigation, the digitalization of compliance, forensic diligence or a complex litigation matter.

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Earlier, many companies did not possess advanced analytical and monitoring tools and ended up ignoring suspicious or unusual activities as there was little evidence available. Today’s digitally driven world has given rise to emerging technologies being used extensively, making it possible to detect fraud and reduce corrupt practices.
Harshavardhan Godugula
EY India Forensic & Integrity Services Technology & Innovation Leader

Technology enabled tools and platforms can also help organizations in their fraud and risk mitigation efforts. EY Digital Integrity Analytics is an advanced data analytics platform that can help companies gain insights into their data and help identify potential procurement fraud red flags pertaining to high-risk vendors or transactions within the procurement life cycle.

EY Digital Integrity Analytics combines the extensive use of heterogenous sources of data, and statistical and predictive models, to indicate and identify issues and areas demanding further review. Through fact-based evidence, actionable business decisions are driven. The Digital Integrity Analytics platform includes a specific management information dashboard that provides risk scoring and a summary of red flags. In addition to the wide-ranging suite of data analytics, it also offers capabilities to control follow up reviews and investigations through case management workflows.

Summary

As fraud, bribery, and non-compliance continue to threaten businesses, a technology-level readiness approach can provide unrivalled opportunities to mitigate procurement fraud risks, enhance transparency, and governance.

About this article

Authors
Arpinder Singh

EY Global Markets and India Leader, Forensic & Integrity Services

Leading forensic accountant and veteran expert witness. Advising global clients on compliance, anti-corruption and corporate governance. Disruptive thinker. Technology aficionado. Author.

Harshavardhan Godugula

EY India Forensic & Integrity Services Technology & Innovation Leader

Technology leader. Advising the C-suite on building safer enterprises through cyber incident response, data governance, fraud analytics and eDiscovery services. Driven by innovation.

Related topics Forensics Data and decision intelligence AI Technology Digital
Upvote