Editor’s Note: In the spirit of “Throwback Thursday,” we’re bringing our audience this gem from all the way back to the summer of 2010, Ardent’s first summer. It’s been some time since we’ve covered procurement fraud on CPO Rising, and although the topic isn’t rosy, it reminds us of warmer days when the article first published. We hope our readers will find it useful.
Proverb: One bad apple spoils the barrel
Scientific Fact: One bad apple spoils the barrel
Organizational Behavior Research: A bad apple (at work) can spoil the barrel
Bad Apples – every enterprise has them. The challenge for Chief Procurement Officers and other supply management executives is to identify, quarantine, and expel them before the barrel becomes tainted. While it’s certainly preferable to avoid a bad apple altogether; policies, processes, and cultural pressure can be used to keep the bad ones in-line and the “ripe” ones from turning.
One bad supply management “apple” made front page news this week. Yes, our world – supply management – has captured this week’s business headlines with a sordid supply management story at Apple. (Sidebar: I am still waiting for the day when stories like this one capture and hold the business headlines; $12 Billion is nothing to sneeze at).
For those of you just back from vacation or muddled in the dog days, I’ll bring you up to speed: last Friday, Apple global supply manager, Paul Shin Devine, was arrested and charged in US Federal Court with 23-counts of wire fraud and money laundering that stem from his allegedly receiving more than $1 million in kickbacks from six Apple suppliers. Apple also filed a civil suit against Devine. Procurement in the headlines… but for all the wrong reasons. Truth be told, it doesn’t look good, but Devine is innocent until proven guilty…that’s American as apple pie (Update: Devine plead guilty and was sentenced to a year in jail, which we covered in CPO News – December 19, 2014.)
Truth be told, it’s a very interesting story (high-profile company: Apple, is there any higher?; high-profile products: Devine managed supply for the iPod and iPhone; high drama: international trade, secret accounts, espionage, laundering, and more than $1 million) and one that we’ll continue to track and offer commentary as appropriate – we’ll leave the news coverage to the pros like The Financial Times and Wall Street Journal which have both been providing great coverage (subscriptions required); the San Jose Mercury News and Bloomberg have done a good job too (no subscription needed).
Procurement fraud is not common, but it is very real. Whether it’s a CFO of a Dow Jones Component or a scheming event planner at a well-run shop or a US Department of Agriculture staffer who embezzled more than $640K using a purchasing card or the ‘President’ of a business unit within an NYSE-listed company making dubious hotel selection decisions (they don’t all make the news), procurement fraud is very real; it can also be very costly; one major goal is to make it very risky to undertake.
But fraud is a potential risk for almost any enterprise, business unit, or department. A certain level of trust is placed in every employee to ensure basic continuity of operations and commerce. Fellow alum and noted criminologist, Dr. Donald R. Cressey is credited with developing something called the Fraud Triangle which according to Wikipedia,
“describes the three factors that are present in every situation of fraud:
- Motive (or pressure) – the need for committing fraud (need for money, etc.);
- Rationalization – the mindset of the fraudster that justifies them to commit fraud; and
- Opportunity – the situation that enables fraud to occur (often when internal controls are weak or nonexistent).”
According to Cressey, the key to fraud deterrence is literally “breaking” this triangle by completely eliminating one of the three factors. And, “of the three elements, removal of Opportunity is most directly affected by the system of internal controls and generally provides the most actionable route to deterrence of fraud.”[i]
Our next article will look at the strategies used by a few CPOs (and CPO-types) to prevent procurement fraud.
Until then, since one good strategy a day keeps the bad apples away – I am really curious to hear from you on this topic, specifically –
(1) What is your organization doing to “break” the Fraud Triangle and eliminate the bad apples?
(2) What fraud prevention strategies do you have in place today? What do you emphasize or prioritize?
(3) What are the most effective strategies to minimize procurement fraud?
[i] (Cendrowski, Martin, Petro, The Handbook of Fraud Deterrence)