Purchasing Fraud: Detection & Prevention Checklist

Reprinted with permission by the Financial Management Network.


by Leonard W. Vona, CFE, CPA
Director of Internal Audit for the Research Foundation, State University of New York

The potential for fraud during any phase of the purchasing cycle is enormous. To detect fraud warning signs and save your organization untold dollars, add these steps to your next procurement audit:

  • Focus your sample on the 3-5 year history of a particular purchase. What trends do you see and - more importantly - don't see?
  • Use the wealth of information available in public records and on-line databases, and access computer data analysis. Match employee files to vendor files to ensure no conflict of interest. Search files for a fraud trail by looking for important missing data, inconsistent data, unusual sequences, or illogical codes.
  • Check the history of disqualified vendors. Does a pattern of favoritism exist? Are dissimilar vendors being compared?
  • Identify restrictive specifications by comparing bid specs to a vendor's catalogue.
  • Focus on financial gain on and off the books Remember: nobody steals the liabilities.
  • Perform a risk assessment by expenditure type (i.e., equipment rental, ghost equipment, substitute equipment). Are they higher than fair market value?
  • Know the business/product you are auditing. For example, when reviewing a landscaping contract, understand the average cost to install a red maple.
  • Create sound vendor selection criteria and controls that will make future procurement fraud more difficult.

This article is reprinted from TranMISsion Online, with permission by the MIS Training Institute. Founded in 1978, MIS Training Institute is the international leader in audit and information security education. MIS offers leading-edge seminars, topical conferences, on-site training, and Web-based training at www.misti-online.com.