The following article was prepared by Mike Taylor, C.P.M., for distribution to ISM affiliate newsletters

Procurement Fraud?
Where Did All Of Our Money Go?
May 2011

What is the value of a tightly managed procurement process? Why should a company have invoice review and payment procedures that separate ordering authority from payment approval responsibility? Why should managers insist that everyone – including senior managers- follow approved procurement processes and not set precedents for bypassing processes? Why should convoluted transactions and procurement anomalies automatically raise audit flags? What can happen when a company loses control of how money is spent?

In a recent lawsuit, a Microsoft manager is accused of misappropriating hundreds of thousands of dollars by manipulating procurement and invoice payment processes. Whether he is actually guilty or not, is not the issue. The important thing for us to understand is that the alleged scheme is plausible, and could be factual. It’s not surprising given Microsoft’s huge volume of subcontractors and subcontracted work. But look closer at what investigators say occurred, and it become obvious that it could happen anywhere, even in small companies.

Even in the smallest company, bypassing reasonable expenditure controls can allow valuable company assets to just trickle away. In this case some of the red flags are obvious:

  • Bypassing a normal procurement process to make payments
  • Mangers negotiating side agreements directly with contractors
  • Submitting one contractor’s invoice to another contractor for payment
  • One person making the agreement and also approving the payment
  • Failure of internal controls to highlight questionable payments

Whether for nefarious purposes, or just plain waste, money lost hurts and could scuttle the business. What can companies do to avoid this pitfall? Establish clear procurement processes based on sound accounting controls and principles. Then question anything that doesn’t fit.

Here is one previous presentation which discusses procurement fraud:

 Here is a Google search for other related articles on my web site.

Mike Taylor


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