Purchasing and Distribution of Procurement Fraud - Book Report/Review Example

 Purchasing and Distribution of Procurement Fraud 1) Introduction This study highlights the concept of procurement fraud. Procurement fraud can be considered as one of the complex frauds that take place in supply chain activities. While investigating these types of frauds all possible options need to be taken into consideration. Procurement fraud is associated with product or service lifecycle. Globalization has benefitted large scale supply chain operations. Organizations in current scenario are able to outsource goods or services from different regions. This enabled firms to gain economies of scale. These outsourcing activities are closely knitted with wide array of fraudulent cases. The case study clearly reflects upon such fraudulent cases related to procurement. Corporate governance is an essential component within supply chain operations. Suppliers play a key role in such operations and need to be well aligned with corporate governance structure. However suppliers are often witnessed to exhibit unethical behaviour that disrupts the entire supply chain procedure. This form of unethical behaviour results into procurement fraud. In this study a thorough analysis shall be conducted on procurement fraud and various preventive measures which are adopted. Risk assessment tools would also be mentioned in this study as it helps to eradicate supply chain fraud to a great extent. 2) Discussion 3) Three types of supply chain frauds In current business environment fraud and supply chain are strongly related to one another. Supply chain possesses global characteristics. Fraud is being frequently committed both in private and public sectors. Supply chain fraud revolves around wide set of elements. It is a representation associated with a material point that is intentionally made and adversely affects victims. Fraud in supply chain operations affects different touch points like purchasing, manufacturing and distribution. There are some key areas of supply chain operations like theft, piracy, bid ragging, child labour, product tampering, corruption and bribery, gray market product, food fraud, etc. Supply chain fraud mainly results due to some key conditions which have been outlined in figure1. Figure 1: Enablers of Fraud (Source: Katz, 2012) As per figure1, internal controls play a significant role in context of efficiently managing supply chain operations. When there is any form of inadequacy to regulate internal controls it results into supply chain fraud. The three important supply chain frauds are asset misappropriation, financial misrepresentation and corruption or bribery. 3.1) Type 1 - Asset misappropriation Asset misappropriation is highly observed in various forms in supply chain like cash theft, forgery, unpaid services, merchandise theft, payroll schemes and billing schemes. Asset misappropriation mainly happens when there is an unauthorized access to identity, likeness or name. This kind of asset misappropriation is usually done without taking consent of respective individuals and it causes harm to those individuals (Chopra and Meindl, 2007). 3.2) Type 2- Financial misrepresentation Financial misrepresentation in supply chain mainly deals with expense recognition, revenue recognition, channel stuffing, asset inflation, insider trading, earnings manipulation and cookie-jar accounting (Walden, 2009). Financial misrepresentation is another supply chain fraud which is concerned with asset inflation. Expenses at times are inappropriately calculated by suppliers or dealers and this leads to supply chain fraud. 3.3) Type 3 – Bribery or Corruption Bribery or corruption is highly observed in supply chain activities since main focus is on acquiring large percentage of profit margins. This factor is observed in the form of government official bribery, commercial bribery, kickbacks, insider trading, poor decision making and contract manipulation. Bribery or corruption is associated with suppliers being influenced to adapt unethical practices for money. Contract manipulation is also an integral component of bribery. There are instances when contract are manipulated by suppliers in order to accomplish individual interests. 4) TWO preventative measures to address fraud in supply chains The two preventive measures that are taken to mitigate any form of supply chain frauds are exercising whistle blowing activities and incorporating a procurement breach process. 4.1) Preventive Measure 1 – Whistle Blowing Whistle blowing activities are usually encouraged across large organizations in order to identify whether there is any form of supply chain fraud taking place in the workplace (Mitra, 2012). There are individuals who are recruited by top management to serve as whistle blowers. These whistle blowers are solely responsible to understand whether any fraud is being exercised by suppliers or organizational staff. It is major responsibility of whistle blowers to structure a report and communicate it to top management. 4.2) Preventive Measure 2 - Procurement Breach Process A common policy needs to be framed which shall be communicated across all departments. Every supply chain participant needs to be well aligned with this form of policy. This would outline potential fraud cases for those who fail to fulfil all procedural norms. Asset misappropriation or bribery can be eradicated to a great extent through following conditions of procurement breach (Monczka, Handfield, Giunipero and Patterson, 2008). On the other hand, whistle blowing activities also prove to be an efficient measure in terms of identifying fraudsters at an early stage. 5) Stages of business continuity planning There are different crisis scenarios which affect business operations and it is often regarded as organizational risks. Specific circumstances tend to affect business operations like theft, natural disasters, power cut, fire, restricted access, failure of IT system, key staff illness, terrorist attack, disease outbreak, crisis affecting customers or suppliers, impact of crisis on business’ reputation, etc. A phased approach is usually considered the best procedure to accomplish long term objectives. Business continuity planning encompasses six main stages in context of risk management. There are some key stages which highlight the entire procedure of business continuity planning (Taylor, 2007). The first stage is of developing a roadmap. This roadmap outlines position of a company in present scenario and what it intends to become in nearby future. However it needs to be taken into consideration that business continuity planning is not a one-time project. There are significant changes which have to be incorporated while the company is operating in an industry. The next stage is of risk identification. Probable risks have to be identified in context of both business and IT. The key deliverables initiate choices for the business continuity plan. An organization needs to decide firstly some parameters that can be implemented before or after a disaster (Kumar, 2007). This helps an organization to come out of a risky scenario and adapt to changing business scenario. It facilitates company to eliminate risks during the continuity of business operations. Every company should be able to undertake well-planned and informed choices prior to any business condition. Budget planning is the third stage of business continuity planning. The plan should set forth a budget regarding what has to be done, its associated costs and time period required for overall procedure. Right plan has to be a sustainable effort from industry perspective. The available resources and time period needs to be utilized efficiently so as to accomplish set long term objectives. Rate and catalogue the threats are the next stage of business continuity planning. This factor mainly contributes towards survivability of a company. These threats are demystified by an organization so as to make them resolvable and approachable (Samociuk and Iyer, 2010). Organizational empowerment can be achieved when team members are inclined towards analyzing a situation well. An organization should possess sufficient knowledge base to tackle crisis situation and overcome such scenarios. Companies need to be reactive in their actions rather than staying proactive by nature. The next stage is to enhance those points which could be effective for accomplishing long term objectives. Business continuity is not only about identifying probable flaws in a system and fixing them but it is also associated with determining what is working well and then to strengthen those aspects (Leeman, 2010). This step is a strategic option for organizations since it enables a company to remain competitive in the industry. The last stage of business continuity planning is thinking outside box. Organizations are often not able to identify disasters or any loopholes in their strategic planning procedure. However it is always essential to think out of the box. This in turn helps a company to undertake different reactive measures. In many cases experts are hired to guide a company in context of choosing right path to be followed. 6) Risk Assessment Tools As per the report, common sense and judgment are important components when it comes to analyzing supply chain frauds. Purchasing organizations need to implement appropriate risk assessment tools so as to avoid any type of fraud. Risk assessment is all about identifying major risk elements present in supply chain operations. Supply chain fraud can be eliminated if an ethical practice is incorporated in all stages. Suppliers need to analyze CSR practices and perform as per set standards. There are three risk assessment tools used by companies to prevent supply chain fraud. 6.1) Tool type 1 – Supply Chain Mapping Firstly supply chain mapping is an innovative concept that helps to predict probable risks associated with supply chain. In this mapping three parameters are taken into consideration like value flow affected by suppliers, performance, value or revenue related affects, and various interdependency effects. Mapping facilitates analyzing key risks linked with supply chain. These risks are then arranged according to priorities. It enables management to undertake reactive measures as per priority list of identified risks. Nature of supply chain risks once identified helps to prevent any form of fraudulent cases. 6.2) Tool type 2 – Collecting Risk Factor Information The next risk assessment tool is to acquire risk factor information closely knitted with key suppliers. This tool outline risks strongly related to suppliers which can disrupt supply chain procedure. On the other hand, this type of risk identification also plays a major role in supply chain fraudulent cases. Questionnaires are designed to gather risk related information from suppliers. This information is then grouped to analyze most risky scenarios prevalent at supplier’s end in a supply chain. It mainly encompasses IP issues, experience, risk management relationships and skills. In overall context these details basically provide a key loss scenario where further financial evaluation is conducted. Financial statements are collected from suppliers and used to eradicate any form of supply chain risks. Supplier specific exposures are commonly observed in fraudulent cases and this is assessed through collecting all possible information from suppliers. It can be stated that supplier’s supply chain management is one of the important risk categories to be considered. 6.3) Tool type 3 – Supply Chain Risk Grading The last risk assessment tool which can be employed for an organization is supply chain risk grading. There are different parameters associated with this form of risk assessment tool. Supply chain risk grading is an essential tool that is incorporated before formulation of risk strategies. It is an assessment tool utilized for determining wide array of risk types. This tool helps to assess two most important business areas such as controls and exposures. Advanced technology in present scenario enhances the entire mechanism of risk assessment. There are technology based tools available that enables a firm to grade wide range of identified risks (Christopher, Payne and Ballanthyne, 2005). These risk assessment tools supports a firm to safeguard its profits, company reputation and reduce adverse impacts of supply chain frauds. Technology based risk assessment tools helps to rapidly identify any form of risk linked with supply chain participants. Their long term and short term implications are also portrayed with the support of such advanced technology based tools. Risk assessment tools are generally developed over a span of several years in order to facilitate effective results. Tier two suppliers are likely to be involved in any kind of supply chain fraudulent cases. 7) Summary As per this study, supply chain operations are subjected to wide range of frauds. These frauds are initiated by outsiders or even by supply chain participants. It has been observed that supply chain frauds tend to disrupt brand image and provides scope for other companies to grow in market place. Ethical practices should be mandatory in supply chain operations since many products or services are outsourced from other countries. This can be stated as an added advantage gained by companies through globalization. Outsourcing activities were previously not encouraged by companies but in modern era it has become an integral part of supply chain process. There are organizations that are completely dependent on purchasing or sourcing. Supply chain fraud results due to suppliers not being able to be well aligned with common business goals and objectives. Suppliers incorporate unethical practices because they do not wish to compromise on their profit margins. This leads to supply chain frauds since contracts are manipulated as per common interests and goals. Supply chain risks are of various types such as asset misappropriation, financial misinterpretation and bribery or corruption. However effective risk assessment tools enable organizations to eliminate any form of supply chain risks. References Chopra, S. and Meindl, P., 2007. Supply chain management: strategy, planning, & operation. New Jersey: Upper Saddle River. Christopher, M., Payne, A. and Ballanthyne, D., 2005. Logistics, the supply chain and competitive strategy. UK: Butterworth Heinemann. Katz, N. A., 2012. Detecting and reducing supply chain fraud. London: Gower Publishing, Ltd. Kumar, S., 2007. Connective technologies in supply chain. New Delhi: CRC Press. Leeman, J. J. A., 2010. Supply chain management: fast, flexible supply chains in manufacturing and retailing. Germany: Book on demand. Mitra, A., 2012. Fundamentals of quality control and improvement. New Jersey: John Wiley & Sons. Monczka, R., Handfield, R., Giunipero, L. and Patterson, J., 2008. Purchasing and supply chain management. USA: Cengage Learning. Samociuk, M. and Iyer, N. K., 2010. A short guide to fraud risk: fraud resistance and detection. UK: Gower Publishing, Ltd. Taylor, M., 2007. Global economy contested. New York: Routledge. Walden, J. L., 2009. Modelling and benchmarking supply chain leadership: setting the conditions for excellence. London: CRC Press. Read More