Is it worth a free lunch?

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Are your purchasing policies open to fraud? Are your suppliers robbing you blind? More to the point are they bribing your staff? Are you in control of your processes? What steps can you take to reduce fraud, control purchasing and make it less likely that you are haemorrhaging through inadequate procurement control?

The Fraud Advisory Panel suggests that fraud costs the UK from £5Bn to £12Bn each year. Some hands-on serious and organised criminals become involved in white-collar frauds, for example involving the misuse of trusts or the manipulation of company accounts / shares.

Regardless of your company’s size, fraudulent practices may be affecting you right now. It needn’t be high-tech Internet fraud; it could be a simple case of purchasing fraud. This can affect every business. But it is not just a case of locking the stationery cupboard, or deterring staff leaving the building each night with 20 toilet rolls stuffed under their coat. While petty pilfering can constitute a significant part of a company’s turnover other practices are against the law and are punishable.

In the retail sector, many large blue chip groups suffer from ‘shrinkage’. Losses through theft, stock room loss, breakage or goods passing ‘sell by’ dates, the value of which may never appear on the public balance sheet, but can amount to tens of millions of pounds. Most retailers accept that 6% shrinkage is an okay figure. But for a retail chain with a £100M turnover, this will equate to an annual loss of around £6M. Is this acceptable?

Employees are trusted to act appropriately, but there is no greater incentive to act inappropriately when one controls the company purse strings.

Gaining a competitive edge when purchasing can lead to inducements. Those of us involved in buying and selling for a living know just how competitive clinching an order for a supplier can be, and we realise how hard it is to make profit under these circumstances. So why should a seller give away to the buyer some of the hard won profit in the form of entertaining, free travel, buyer hospitality or gifts? A buyer will always claim that the acceptance of inducements will not influence the choice of supplier decision in the slightest. Inducements cost the supplier in the form of reduced profit. They are offered to unfairly distort, influence or erode the impartiality of the buying decision making process.

In banking, strict guidelines ensure staff with the power to purchase are moderated, and fraud is kept to its absolute minimum. The European Bank for Reconstruction and Development warns that any staff member involved in purchasing activities or dealing with suppliers must be fully aware of the Bank’s rules as many billions of pounds of client money is at stake. A supplier trying to gain an unethical advantage, such as the offer of a bribe or inducement in any form should be reported under the appropriate procedure. Staff are referred to the Code of Conduct and the Procedures for Reporting Fraud and Suspected Fraud. In the Bank’s eyes, there is no such thing as a ‘free lunch’ and even gifts at Christmas are seen as a bribe and not a ‘thank you’ for good business practice, or service. Inland Revenue employees are bound by the Prevention of Corruption Act 1906, which states: “At all times staff involved in purchasing should take care that they do not give the impression… that they have been or may have been influenced by a gift or consideration to show favour or disfavour to any person or organisation.”

It is the directors’ responsibility to ensure measures are in place to minimise the fraudulent abuse of company funds, intellectual property or products. Regardless of size, all business can affect safe and potentially fraud free purchasing by following controls including appointing a centralised purchasing officer, or department, through who all transactions are made; instructing suppliers that purchases can only be made with an authorised ‘Purchase Order’, with a sample of the authorising officer’s signature; setting a ceiling limit for all purchase orders, above which a second signature is required; and supplier invoices will only be paid if they show a relevant purchase order number of authorisation.

The old saying “An ounce of prevention is worth a pound of cure” is particularly applicable to procurement activities. Be aware of your reputation, as fraud and corruption can raise the costs and risks of doing business. n

Paul Sherman is managing director of push purchasing specialist Broaden.

Tel: 0870 760 7900.

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