FRAUD RISK IN PUBLIC PROCUREMENT NATIONAL PUBLIC ENTITIES RISK MANAGEMENT FORUM Presenter: Zamani Nxumalo SAS, National Treasury 30 March 2011
CONTENTS Key Terms & Definitions Process & Challenges Fraud Risk in Procurement Process Seeking Practical Solutions - Fraud risk assessment - Fraud schemes ACFE - Fraud risk assessment tool - ACFE Other Matters Questions & Inputs 2
Key Terms & Definitions Fraud (Snyman) An unlawful and intentional making of misrepresentation which causes actual prejudice or which has a potential prejudice to another party [Misrepresentation, intention, unlawfulness & prejudice/ potential] Corruption (Sec 3 & 4 of PRECCA) Persuasion of a public official by promise of a benefit s/he is not entitled to and which influences her/him to perform unlawful task or fail to perform task which he is lawfully expected to perform [Accepting, Giving, Gratification, Inducement, Unjustified results] Procurement function Procurement fraud Fraud prevention Investigation Supply chain management Fraud schemes in the procurement processes Formal process (mechanisms/measures) to prevent incidents of fraud Re-active process to incidents suspected or reported [Prosecution & recovery] 3
Process & Challenges Demand management Acquisition management Logistics management Disposal management Objective analyses [ are goods to be procured aligned to achieving strategic objective] Lack of accountability [performance management] Lack of risk management [strategic & projects] Placing an order [cash purchases, verbal & written quotes and competitive bidding] System flaws [thresholds] Lack of clear policies Targeted employees [awareness & training] Responsibility [shifting at cost] Rotation of suppliers Lack of risk assessment [operational] Delivery Receiving goods Internal controls [records, quality, physical, movement, etc] Risk management [consultation work] Life span Asset management policies Projects [focus on success] Clarify responsibilities 4
Fraud Risk in Procurement Process Fraudulent acts Conflict of interest [self-contracting] Kickbacks & bribery [corruption] Leaking bid data Shell companies Cover quoting Exclusion of qualified bidders Inflated prices billing schemes Cases & escalation of risk Declarations of interest control or legislation??? Staff morale > Rationalisation > Fraud Gift registers policy or legislation??? Reputation > poor quality Transversal tenders case Litigation > loss of funds Fictitious order case Payment for no goods > loss of funds Poor quality > impaired objectives Changing of minutes case Poor quality > loss of funds Inflated orders case Loss of funds > impaired objective 5
Seeking Practical Solutions Fraud risk assessment Identification of fraud risk Evaluation Response Monitoring Stage/Area/Target Demand, Acquisition, Logistic and Disposal Inherent fraud risk, Likelihood and significance / impact. Most vulnerable areas [type of schemes exposed to, i.e. asset misappropriation] Effectiveness & efficiency of controls Residual fraud risk Preventative and detective controls Evaluate the effectiveness of identified controls An ongoing process [use of risk registers, see below] No Identified Risks and Schemes Likelihood Significance People and/or Departments Existing Antifraud Controls Control Effectiveness Residual Risks Fraud Risk Response No Risk Category Risk Description Risk Factor Likelihood Impact Existing Antifraud Controls Residual Risks Fraud Risk Response 6
Seeking Practical Solutions CONTINUED ASSET MISAPPROPRIATION Cash Non-Cash Theft Skimming Misuse Theft Cash on Hand Deposits Sales: Unrecorded Understated Fraudulent Disbursement Receivable: Write-off schemes Lapping schemes Unconcealed Refunds Asset Requisitions and Transfers False Sales Purchasing and Receiving Billing Schemes: Shell Companies Personal purchases Payroll Schemes: Ghost employee Falsified wages Expense Schemes: Mischaracterized Overstated Fictitious Reimbursements False refunds 7
Seeking Practical Solutions CONTINUED SCM ASSESSMENT QUESTION RESPONSE 2.00 COMMENTS (Compulsory if 'Partial') People and/or Department Additional Information on the Area being assessed ASSOCIATED RISKS 85 Does the institution have a purchasing department? YES 3 The organization should have a purchasing department that is separate from the payment function. 86 Is the purchasing department independent of the accounting, receiving, and shipping departments? PARTIAL 2 The purchasing department should be independent of the accounting, receiving, and shipping departments 87 Do purchase requisitions require management approval? NO 1 88 Do purchase orders specify a description of items, quantities, prices, and dates? 89 Are purchase order forms pre-numbered and accounted for? 90 Does the Institution maintain a master vendor file? 91 Are competitive bids required for all purchases? Management should approve all purchase requisitions PARTIAL 2 Purchase orders should specify a description of items, quantities, prices, and dates N/A Purchase order forms should be pre-numbered and accounted for YES 3 The Institution should maintain a master vendor file NO 1 Institutions should require competitive bids for all purchases 92 Does the receiving department prepare receiving reports for all items received? PARTIAL 2 The receiving department should prepare receiving reports for all items received. 8
Other Matters Practical approach Effectiveness, efficiency and economic value Compliment FPP with other policies of the institution Recruitment policy HR&D Asset acquisition & disposal policy Asset Management Goods & services procurement policy - SCM Document retention policy [suitable for the institution] Whistle-blowing policy [best method to uncover] Results orientated institution Prevention vs re-action Cost vs benefits 9
Questions & Inputs I have never let my schooling interfere with my education Mark Twain US humorist, novelist, short story author, & wit (1835-1910) Zamani Nxumalo National Treasury OAG: Specialised Audit Services Tel: 012 395 6532 Email: zamani.nxumalo@treasury.gov.za 10