Corruption and Purchase to Pay

Corruption and Purchase to Pay

Posted by Pete Loughlin in Purchase to Pay 06 Apr 2010

Purchase to Pay, P2PPeter Smith in Spend Matters recently wrote about his naivety as a young purchasing manager thinking that corruption always happened somewhere else. Well, as he writes, it doesn’t and as Peter points out in a few examples, it is not just in far flung places abroad that it occurs.

I once performed a piece of analysis on the purchase to pay processes of a very well know internet infrastructure business. It was at the height of the internet boom in the late ’90s and expansion was more on their minds than P2P was (see: What is Purchase to Pay?) , so it was no surprise to find that I could drive a bus through the loopholes in their business processes. I found what is actually a very common problem within the payables function. On reciept of an invoice, it was matched it with a P.O. then paid. If there was no P.O. they would create one retrospectively. Now this is a common malpractice. I’ve seen this many many times but it is normally something that is done with smaller invoices. But in this case – there was no limit. I saw a $100,000 invoice, with no P.O., being paid and reconciled against a retrospectively created order.

Like I said, back end processes weren’t high on the company agenda so I had a challenge. How do I report this malpractice and give its important the weight necessary for people to listen? So I told them the way it was.

“Your suppliers are stealing millions of dollars from you.”

Did I have direct evidence of fraudulent supply chain activity? No. I didn’t need it. I’ve worked on both sides of the fence and I know that if an account manager can submit a false invoice at the end of his reporting period that moves him into bonus, he’ll do it – regardless of whether there was an order. And if he finds a supplier that gives tacit approval of this practice by not querying it, he do it again, and again. If it can happen, it is happening. I guarantee it.

Failure to Implement Purchase to Pay is an Invitation to Fraud

Perpetrators of this kind of scam are not master criminals or warped people with personality disorders. They are people who see this kind of fraud as a victimless crime. Part of business. And, I have to say that the organization that fails to implement proper purchase to pay processes to prevent it is inviting fraud and CFOs should be held responsible and their culpability recognized.

Pretending that fraud happens somewhere else is naive. Accepting that corruption in all of its forms, from self enrichment and fraud to turning a blind eye to proper process, is a normal part of business. Everyone has their price. Anyone who thinks that they or their colleagues are beyond corruption has never seen it in action. The first part of tackling a problem is acceptance.

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