Editor’s Note: In the spirit of “Throwback Thursday,” we’re bringing our audience this gem from all the way back to late summer 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 the early days of the firm when the article first published. We hope our readers will find it useful.
Today, we are pleased to bring a fraud and accounting forensics expert into our discussion of Procurement Fraud Prevention: Matt Rogers, a Director in the Financial Advisory Services practice of AlixPartners, LLP’s Washington D.C. office. Matt has over 20 years of experience in auditing, accounting, and conducting financial investigations, including a decade spent in senior management level positions at both the Unites States Securities and Exchange Commission’s (“SEC”) Division of Enforcement and the Public Company Accounting Oversight Board’s Division of Enforcement and Investigations. Matt specializes in accounting fraud, forensic accounting investigations, auditor conduct investigations, and auditor independence matters and has experience in analyzing, designing and implementing business processes and internal control systems. Two other highlights: Matt was the lead accountant for the SEC in its case against WorldCom which resulted in a $2.25 Billion penalty; and from 2006 to 2009 developed and taught a course on Fraud Investigation to Masters’ students at The George Washington University (“GWU”).
Our discussion with Matt began with a focus on corporate fraud in general, “On day one in my Fraud Investigation course at GWU, I introduced the students to Cressey’s ‘Fraud Triangle’ which looks at the three contributing factors to fraud – Pressure, Rationalization, and Opportunity. If you can remove one of those three legs, you substantially reduce the likelihood of fraud” (Sidebar: We also introduced the “Triangle” in day one of our procurement fraud coverage here. The Fraud Triangle describes the three factors that experts believe are present in every instance of fraud.).
Pressure and Rationalization
While most companies focus on eliminating the Opportunity “leg” of the triangle by seeking to place tight controls around their procurement operations, Matt feels that there is real value in focusing on the other two legs as well (pressure to commit fraud and a rationalization that committing fraud is acceptable). These efforts can (and should) start early and begin with the hiring process where detailed background and reference checks as well as honesty testing can be effective tools to help root out bad apples before they infect the company barrel. Once employees are in the fold, Matt believes that employee help-lines (a phone service that provides free counseling and advice to employees) can serve as an effective way to help alleviate the different personal and/or professional pressures that may drive employees to commit fraud.
Governance is supremely important and in Matt’s view, it starts at the top, “Employees mimic executive attitudes and behaviors….. so, while training employees on a ‘Code of Conduct’ is important, it is alsovery important that executive management play a visible role in the roll-out and training of the policy – such as developing, teaching, or otherwise actively participating therein.” Matt highlighted the importance of having fair and equitable dealings with all employees, as resentment can fester into a rationalization for fraud. For enterprises seeking to establish or improve their governance programs and internal control systems, Matt says that COSO’s (“Committee of Sponsoring Organizations”) guidance provides a useful framework for most corporations.
When it comes to removing procurement fraud opportunities, Matt suggests several strategies including segregation of duties throughout the procure-to-pay process, especially the process of vetting and adding vendors to the enterprise’s approved vendor list. Matt also recommends having two people sign (or approve) disbursements above certain dollar thresholds. Matt believes that the accounts payable department can play an important role in the detection and prevention of fraud through ‘red flag’ detection training, such as how to identify fake invoices (Sidebar: Matt provided a series of tips that we’ve chosen not to share in this article, since they could possibly help those looking for opportunities to conduct fraud). Finally, Matt believes that a company’s internal audit department should regularly conduct audits of the procurement and accounts payable functions.
Matt’s work in fraud also focuses on its detection after the fact. The level of sophistication in the audit and sampling methods that Matt has developed and employed is quite sophisticated and once detailed should scare most potential fraudsters away from the dark side. Again, we won’t share the secret sauce in this article, but there are a variety of ways that Matt and pros like him can stratify the transaction/supplier/employee populations using advanced sampling strategies and focused investigative procedures. One method that we will share (to give you an idea of how advanced today’s crime detectives are) is the use of Benford’s Law to identify payment patterns that suggest high-probability areas where attempts are being made to bypass the system (Benford’s Law, described in more detail here, states that the numbers in many ‘real-life’ data sets are normally distributed). While people may lie, evidence never does. Great stuff Matt!
We’ll continue this discussion with Matt in our next article.