Where maverick spend goes too far

Author: Jonathan Webb - Categories: Risk management

Procurement is a high risk function, where high volumes of transactions and heavy expenditure can often mask unethical or fraudulent purchasing. Not only are strict internal regulations and procedures required, but the capacity to ensure that staff are complying with these policies.

There has been a spate of scandals in the press about companies and buyers engaging in illicit contracting. These scandals can affect any company in any sector and in any location. For instance, former South African Airways CEO, Khaya Ngqula, is being pursued by his former employees to recover US$4 million in fraudulent transactions. The air carrier contends that Ngqula took friends to sporting events, including the 2006 football World Cup in Germany, the 2007 rugby World Cup in France and a 2008 tennis tournament in Monte Carlo. In addition to which, he awarded substantial contracts to companies where he had an interest.

In the US, General Electric agreed to pay US$23.4 million to the authorities after the SEC alleged that the Denver-based company paid Saddam Hussein's Iraqi regime US$3.6 million in kickbacks to win a contract. Similarly, the US Department of Defense came under criticism when it admitted that it could not account for 95% of the US$9.1 billion Iraqi reconstruction fund. A government audit found that the Pentagon could not "readily account for its obligations, expenditures and remaining balances associated".

To address its own control weakness, Siemens has launched a compliance drive to ensure ethical employee action. A string of scandals across four continents cost the Germany-based white goods manufacturer US$3.2 billion in penalties to various national authorities. The hit to its reputation was far bigger. Between 2007 and 2009, Siemens dismissed more than 600 employees and investigated a total of 2,200 possible violations. Over the last two years, the company released only 240. The reduction is largely attributable to its 'investigation hubs', where regional managers can oversee local transactions.

This is partly a question of management information accounts and internal audit controls. This risk can be reduced through the implementation of spend analysis applications. The PIU is currently examining spend analytics software, with the findings to be published in a forthcoming report.

However, the issue is also a cultural matter. Either the sense of invulnerability or a blind eye towards unethical practice will encourage spend that is not only maverick, but fraudulent. Culture can be changed by ensuring greater visibility within spend data, but also through a changed "tone from the top", as with Siemens' new approach.

Comments

Daniel Walsingham-Watts

Sat 31 Jul 2010 21:10

Yes spend analytics and forensic accounting solutions goes a long way to tighten up compliance but it really comes back to people and ethics. Companies that suffer from control weakness should also look to the actions of the company as a whole, how many look at the ethics of the sales teams that help to feed the actions of there client’s employees involved in buying. You mention Siemens but I can name a number of top technology companies who sales teams perpetuate this unethical practices. It should be a total company act of purging unethical behaviour but you and I know that will never happen in business.

Dave Collins

Mon 2 Aug 2010 13:46

I recently began working with an organization whose primary product I was unaware even existed. And from my early contacts, so are many major corporations. It is referred to as Data Cleansing,and what we do is develop solutions that minimze indirect spend for global manufacturers and eradicate maverick spending. One major client credits our company with reducing their commodity spend by $62 million in 2008 through our services and solutions. Like I said, while I am fairly new to this field, it seems that this is the type of solution
that more major organizations need to explore.

Ben Ngobi

Mon 2 Aug 2010 14:10

Introducing adequate compliance tools are merely the first steps in addressing visibility which ultimately leads to identifying and cracking down on maverick spend. The real challenge lies in how companies ensure behavioural changes occur to complete the cycle. Even then, it is important to sustain changes which will require regular policing.

Ray via LinkedIn

Thu 5 Aug 2010 16:29

Surely by now most organisations have switched on to the problems that can be created by maverick spend and will have systems and procedures in place to identify and address it. I have come across a few instances in my career but they usually resulted from lax management or poorly trained staff. I can think of only one organisation where it was deliberate and systematic fraud. Most organisations I've worked with over the last decade do frequent but irregular data matching between staff and suppliers on postcode and phone numbers etc to pick up on "ghosting" along with a variety of routine analysis on spend by signatory, supplier, product/service category etc., etc. to minimise the opportunity for "maverick" spending.

Jonathan via LinkedIn

Thu 5 Aug 2010 16:29

I think you are right, and the expansion of IT functionality is enabling greater visibility and oversight of spend data. However, as companies grow and buy-in new entities, often there are difficulties in integrating disparate systems. A issue with large companies, which have aggregated many systems after mergers and acquisitions, the management of different systems becomes increasingly difficult. Maverick spend is harder to detect, and the problem, despite a multitude of technological monitoring systems, persists. Perhaps spend analysis needs to be more proactive in identifying and reducing these risks?

Martin via LinkedIn

Thu 5 Aug 2010 16:30

I know of companies where being able to buy is a managerial 'perk', a sign of authority within the organization.
The point of buying within a corporation, or any business unit is that it serves a purpose for the unit, everything is bought with the consent of others, not just because someone want to do it. There is a move in some companies to decentralize purchasing again, claiming that it is inefficient to have everything channeled through a single office; with this, we will again be confronted by managers taking not only ownership but also day to day control of their departmental budgets and there is the danger that they will see the amount they spend as a sign of their corporate power.
regards

Mark Bubner

Mon 9 Aug 2010 08:51

Surely by now most organisations have switched on to the problems that can be created by maverick spend and will have systems and procedures in place to identify and address it. I have come across a few instances in my career but they usually resulted from lax management or poorly trained staff. I can think of only one organisation where it was deliberate and systematic fraud. Most organisations I've worked with over the last decade do frequent but irregular data matching between staff and suppliers on postcode and phone numbers etc to pick up on "ghosting" along with a variety of routine analysis on spend by signatory, supplier, product/service category etc., etc. to minimise the opportunity for "maverick" spending.

You'd think so Ray, but it seems many either don't know what solutions exist to overcome maverick spend, or it's not enough of an itch to scratch.

Any solution should be proactive, so maverick spend can be prevented before it happens. But any proactive solution needs to make following the process easier than going around it.

That's where solutions like VendorPanel.com are coming into their own. They make using the preferred suppliers easy for staff (increasing panel utilisation), & give greater visibility to procurement, without the administrative cost.

It'll be interesting to see the take-up of this type of solution.

Regards,
Mark