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Fraud and Loss Prevention in Retail

April 29, 2015

In the retail sector, it is estimated that, on average, just over 1% of the sales value of goods disappears in the form of shrinkage. Defined as a reduction or loss in physical inventory not resulting from a customer sale, shrinkage breaks down into the following four main categories, with the corresponding 2011 world-wide percentage breakdown figure provided by the Centre for Retail Research:

  1. Shoplifting – 43.2%
  2. Employee Theft – 35%
  3. Administrative / Internal Error – 16.2%
  4. Supplier / Vendor – 5.6%

But, while retailers invest heavily to combat the top two sources of shrinkage, the retailers who are most successful at loss reduction are those who have embedded it as an organisation-wide philosophy and modus operandi. These are companies who seek to plug the loss gaps in all four of the above areas--not only working on deterring theft and payment card fraud, but also on the internal administrative areas and processes where less obvious but nonetheless significant losses are taking place, on a regular basis, under the radar.

One of these areas is Procurement Fraud.

According to the 2012 Annual Fraud Indicator (AFI), more than 41% of survey respondents stated that procurement fraud poses a significant risk to their organisation, but less than 30% said their organisation had ever undertaken a fraud risk measurement exercise. And an overriding theme in the report was that this type of fraud is enabled by a perceived lack of controls and accountability that could be prevented from happening through greater auditing and fraud awareness training.

Indeed, in their worldwide report on Occupational Fraud, the Association of Certified Fraud Examiners (ACFE) found that lack of internal controls was the number one contributing factor to occupational fraud, followed closely by the ease of overriding existing internal controls.

What is procurement fraud exactly? The AFI define it as a deliberate deception intended to influence any stage of the purchase-to-pay cycle in order to make a financial gain or cause a loss. Examples can include price fixing, big rigging, cover pricing, false/duplicate/double invoicing, overpayments, false payments, altered payment details, and delivery of substitute or inferior or sub-standard products.

So, whilst in the retail sector, the issue of fraud has mainly focused on the main sources of shrinkage in the form of consumer or employee theft or identity theft, procurement fraud has up until now gone largely undetected. There is a corresponding historical absence of hard statistics to measure the problem but, as stated in the AFI report, if even a conservative at risk estimate of 1% is used, that would translate into a £20b loss in the UK alone. Current research, however, indicates that this doesn’t begin to estimate the scale of the problem. And in risk consultancy KROLL’s 2011 ‘Global Fraud Report’ it states that procurement fraud is becoming more common.

Echoing these findings, Global Forensic Lead Amanda Aldridge stated in the KPMG report “Procurement Fraud in Consumer Companies”, “I have seen more instances of procurement fraud in the past two years than I have seen in the previous eighteen”. Delving deeper into which departments perpetrators of fraud work in, the ACFE reports that the top six were consistently Accounting, Sales, Customer Service, Purchasing, Executive / Upper Management and Operations.

Once almost shrugged off as a sunk cost of doing business, companies are now starting to ask themselves how they can better understand and detect the issue and then devise procedures and systems to combat it.

So, what can companies do to protect themselves from procurement fraud? Most experts agree that first and foremost segregation of duties is a good place to start, along with standardised reporting and processes, a single well-maintained and regularly cleaned supplier file, and risk management controls. There are also new software solutions on the market which make use of easy, web-based interfaces and cloud-based systems to query an organisation’s transactions and supplier file records to detect fraud before erroneous payments have occurred.

Request our Procure-2-Pay Anti-Fraud Checklist here.

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