Do you have a purchasing department employee who suddenly started taking expensive vacations, wearing expensive jewelry or driving an expensive new car?  There are lots of reasons why an employee might appear to be living beyond their means.  Perhaps the employee or their spouse came into an inheritance, won the lottery, received a sizeable insurance settlement, or had other legitimate sources of money to spend.  But countless fraud investigations also point to those same behaviors as red flags that your purchasing department employee is engaged in fraud.

“The typical purchasing department can provide lots of opportunities for employees to carry out illicit activities,” said David Anderson, principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of fraud investigation and fraud deterrence programs in the Delaware  Valley.  “Employees who deal with outside vendors and who either have the authority to make purchasing decisions or who exert great influence over purchasing decisions are the most likely candidates to become involved in fraudulent activities.”

This posting will examine three of the most widespread types of purchasing fraud that employees perpetrate and provide recommendations for fraud deterrence measures that can help prevent it.

One of the most blatant forms of purchasing fraud involves employees who receive outright bribes or kickbacks from one or more vendors, said Anderson, a forensic accountant who also is a Certified Fraud Examiner in Philadelphia.  Typically, Anderson said, the vendor will charge an inflated price for their products or services or they will provide poor quality products or services as a way of maintaining profitability in light of the bribes or kickbacks.

“One indication that this type of fraud is occurring is the sudden switch from a long-time vendor to a new vendor without there being a good reason for the switch, while the purchasing employee vehemently defends the switch but is not able to sufficiently support the basis for it,” said Anderson, a forensic accounting expert in Philadelphia who has conducted numerous fraud investigations.  “It’s an even greater indication if it is happening with multiple vendors.”

Sometimes, Anderson said, the thought of committing fraud may never have even crossed an employee’s mind, but may have come to his or her attention by a vendor looking to win a percentage of the company’s purchasing dollar or to increase the existing percentage of business they have.

A more subtle form of this kind of purchasing fraud can occur when vendors sponsor sales contests in which a customer — your purchasing employee — can win increasingly valuable prizes (such as vacations, electronics, jewelry, gift certificates, etc.) based on the amount of purchases or the amount of the increase over the prior year’s purchases, according to Anderson, a Certified Fraud Examiner in Philadelphia.

“The vendor has to recoup the money spent on the expensive prizes somewhere,” said Anderson, a forensic accounting expert in Philadelphia who recommends that every company enact a comprehensive fraud deterrence program developed by an experienced firm that provides forensic accounting services in Philadelphia and the Delaware Valley.  “The employee may be accepting higher prices or poorer quality goods or services, or the employee may purchase larger amounts of products or services than are needed in order to ‘win’ more prizes.”

A third scheme that is similar to the first two occurs when the employee receives expensive gifts at Christmastime and/or for his/her birthday from one or more vendors as a “reward” for purchases during the year, Anderson said.

There are several anti-fraud controls and fraud deterrence measures that businesses can embrace to fight fraud in the purchasing department, explained Anderson, whose firm provides a full range of forensic accounting services in Philadelphia and the Delaware Valley.  They are:

• Regularly analyze the cost of products and services to detect increases in costs and identify the reasons for those increases;
• Regularly analyze inventory levels to prevent the excessive purchase of products;
• Validate decisions to switch vendors or to significantly change the level of purchases (up or down) from existing vendors;
• Install a tip line to provide employees with a reliable, anonymous way of reporting suspected fraud;
• Publish company policies that inform employees that the company does not condone fraud and that it is taking active measures to prevent fraud;
• Sponsor regular anti-fraud training programs for managers and employees.

“Of course, the analyses discussed above should be undertaken outside the sphere of influence of the purchasers,” said Anderson, a forensic accounting expert in Philadelphia.  “That means relying on people from outside the purchasing department to conduct the analyses.”

Your internal audit department or possibly the finance/accounting department might be able to perform the analyses, Anderson said.  But if the expertise to perform these analyses is not available in-house or there is no department outside of the sphere of influence of the purchasers, then a third party such as a forensic accountant should be engaged.

A forensic accountant can perform the necessary analyses and design stronger fraud deterrence measures to better protect your business or organization from purchasing department fraud.

If you require the services of a Certified Fraud Examiner in Philadelphia or any other forensic accounting services in Philadelphia and the Delaware Valley, please contact the Philadelphia forensic accounting firm of David Anderson & Associates by calling David Anderson at 267-207-3597 or emailing him at  david@davidandersonassociates.com.

About David Anderson & Associates

David Anderson & Associates is a Philadelphia forensic accounting firm that provides a full range of forensic accounting services in Philadelphia and the Delaware Valley.  The experienced professionals at David Anderson & Associates provide forensic accounting, business valuation, fraud investigation, fraud deterrence, litigation support, economic damage analysis, business consulting and outsourced CFO services.  Company principal David Anderson is a forensic accounting expert in Philadelphia who has more than 30 years of experience in financial and operational leadership positions and is a Certified Public Accountant, a Certified Valuation Analyst and a Certified Fraud Examiner in Philadelphia.