More and more procurement is now being conducted through electronic procurement systems that collect and store masses of digital data. This data can be used to support the installation of automated, proactive fraud detection systems (known as “Fraud Filters” or “Integrity Filters”) that can identify and block potentially fraudulent transactions before losses are incurred – an obvious and enormous advantage.
More specifically, the Integrity Filters can :
- Instantly review 100 percent of all transactions, rather than limited samples as in standard audits
- Block non-compliant or improper procurement transactions, such as bids from companies on ineligible lists, bids received after the bid deadline or other improper transactions
- Provide instant alerts of possible fraud, prioritized by importance and level of risk
- Permit detailed, real-time remote monitoring by oversight agencies, which is not currently feasible in paper procurement transactions
- Create detailed audit trails and digital evidence for auditors and investigators
The Filters can identify the red flags of a number of procurement fraud and abuse schemes, including:
- Collusive bidding
- Bid rigging
- Kickbacks
- Conflicts of interest
- False, inflated and duplicate invoices
- Shell companies
- Phantom vendors
- Purchases for personal use or resale
See more info on the red flags and detection methods of the above schemes at Integrity Filters.
In addition to detecting potential fraud, the Filters can generate other reports, such as:
- Significant procurement statistics
- e.g., the number of contracts awarded to certain contractors by certain approving officials
- Economy and efficiency indicators
- e.g., the selection of the best product for best price, or the failure to do so
- Compliance reports
- e.g., contracts in violation of procurement rules, such as too short notice to submit bids, bids from a debarred company, sole source contracts above the sole source limit, etc.
- “SPQQD” reports
- Selection, Price, Quantity, Quality and Delivery indicators that can point to fraud or abuse
To effectively utilize the Filters, eProcurement systems should:
- In tender transactions, collect all winning and losing bids and related data in a structured, electronic format readable by the fraud detection algorithms. This could be accomplished by requiring the bidders to download and populate standard bidding templates with predefined fields. The bid forms should include line item detail and prices when called for.
- In purchasing frauds, collect the full array of purchasing records – purchase orders, receiving, invoicing and payment information – rather than just purchase orders or receiving documents, as many current eProcurement systems do. Invoice and payment information is necessary to detect and prevent most purchasing frauds.
- An alternative would be to link e-Procurement to an ERP system (such as SAP) or other expense management and payment apps. This would allow the easy integration of the necessary invoicing and payment records with procurement documents.
See more information on the advantages of eProcurement and Integrity Filters at pages 29-42 and ANNEX A in GovTech and Fraud Detection in Public Administration. The full paper discusses the most promising application of digital anti-fraud measures in procurement, financial management systems and HR systems.
