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8 Steps to Automate Fraud Detection in Your Organisation

  • Posted by: aquiliti
  • Category: Automation, Business Intelligence, Finance & accounting, Innovation, Procurement
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Procurement fraud affects at least 30% of organisations in Australia, and the traditional forms of detection are often ineffective and expensive. Retrospective audits often detect fraudulent activity long after it has been perpetrated. Robotic Process Automation (RPA) technology is increasingly being used to automate the detection of fraud in real time and mitigate economic and reputational risk.

 

Based on PwC’s Global Economic Crime Survey 2016, at least 52% of organisations (public and private) in Australia have experienced some form of fraud. Of those, 30% have specifically experienced procurement fraud which resulted in economic loss, reputational damage and unnecessary diversion of funds to cover investigation costs.

With 40% of cases reportedly taking 5 years to detect, traditional fraud prevention and detection mechanisms – such as risk management, audits or whistle-blowing – are taking too long to be effective and require significant resources.

With the rise of Robotics Process Automation (RPA) technology, organisations now have an opportunity to automate the early detection of fraud by putting in place checkpoints that could trigger further investigation by humans. Lower entry costs mean that this method of fraud detection is more affordable for more organisations than standard fraud detection software.

RPA applications in practice

Procurement fraud can start at the vendor selection stage and progress right through to the payment of invoices.

If we look at the most recent fraud case investigated by the NSW Independent Commission Against Corruption (ICAC) affecting NSW Department of Finance, Service and Innovation (DFSI) from June to October 2016 (see below for details); an ICT Contractor dishonestly arranged for a company effectively controlled by him to be invoiced on behalf of another legal entity for an amount over the approved budget. An automated workflow fraud detection process could have detected this by checking in real time the approved PO vs. the sum of invoices value, triggering a detailed revision of these transactions and saving DFSI and taxpayers AU$523K.

ICAC – Investigation into the conduct of DFSI ICT Project Manager

In 2016 a contractor acting as an ICT Project Manager managed to set up the appointment of Petite Solutions Ltd. as a supplier of DFSI under Petite Software Systems.

Petite Solutions was a company created by his mother-in-law on behalf of the ICT Project Manager who lived in the same property, and Petite Software Systems was a legal entity owned by one of its friends.

The ICT Project Manager justified that there were no other suppliers that met the requirements and managed to get an exception approval by the respective approvers. At the same time, the daily rates accepted were double than the already prequalified suppliers.

When submitting the invoices, this contractor also falsified the invoices and changed the bank account details to receive the payments to an account that had control on. The ICT Contractor received $523K to his bank account in addition to his daily rate as a contractor for over three months.

DFSI only noticed the overspend when it had reached approximately 200% of the original contract sum. This triggered the cease of the project and the review of expenses.

NSW ICAC was notified about this case by a DFSI representative in February 2017; the investigation was completed in January 2019.

 

Below are some common examples of procurement fraud and illustrations of how RPA can be applied for early detection:

Fraud Type Description Example of RPA application
Employees conspiring with suppliers
  • Favouritism of a supplier in a competitive market
  • Supplier representative is the employee /contractor’s next of kin
  • Inflation of contract prices above market or fair prices
  • Price benchmarking
  • Single quotes vs. list of pre-qualified suppliers
  • ABN address reconciliation to employee database
Fraudulent supplier set up
  • Dummy supplier registered to employee /contractor/ or next of kin
  • Supplier registered just prior to tender process
  • Automatic check of company registered address vs. employees’/contractors’ or next of kin’s address when setting up vendors
Avoiding approval thresholds
  • Splitting purchase orders (PO) to avoid formal approvals
  • Payment of invoice without a purchase order
  • Extending contract past agreed amounts without approval
  • Automatic analysis of cumulative PO values vs. value thresholds approvals as soon as a PO is raised
Suppliers’ invoices overstated
  • Pricing within an invoice exceeds agreed pricing in contract or purchase order
  • Quantity in invoices is greater than actual goods receipt
  • Sum of items’ cost does not match the total invoice value
  • Automatic 2-way or 3-way matching:  invoice item price vs. agreed price vs. quantity receipt
Supplier GST charge amount
  • Supplier not registered for GST and invoice includes GST
Goods receipt
  • Inventory changes don’t correspond with invoiced and receipted quantities
  • Automatic check of inventory movements vs. invoiced quantities

 

8 Steps to Automate Fraud Detection

  1. Identify the priority procurement fraud indicators based on perceived weaknesses in your organisation’s procurement and payment processes.
  2. Select a pilot fraud indicator to automate. This should be based on the likelihood and consequence of the occurrence and ease of implementation. Checkpoints at the early stages of the procurement process are ideal (i.e. vendor setup, ABN checks).
  3. Determine data sources, outputs to be reported  and timing of reporting (e.g. for severe cases, instant alerts to interested stakeholders)
  4. Outline detection process for each fraud indicator on which to base the automated flow
  5. Deploy automated fraud detection process and reporting
  6. Communicate early outcomes to key stakeholders
  7. Use results to update current processes and governance to continually reduce organisational risk of fraud repeat occurences
  8. Assess and include subsequent fraud indicators for automation

 

Empowering Possible

Aquiliti uses the latest technologies and innovations to empower possibilities. With input from NSW ICAC, we have designed a set of automated workflows to detect prevalent procurement fraud indicators in organisations. These solutions have been created to proactively and effectively reduce the risk of attacks on your organisation by identifying fraudulent activity in real-time, avoiding fraudulent use of funds and potentially saving you millions of dollars.

Our fraud detection solution complements the objectives of internal audit and your finance functions to reduce the burden of any existing manual detection activities, freeing up your team to focus on delivering your business objectives.

Contact us to understand more about automating fraud detection.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



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