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Detecting procurement fraud


Procurement fraud includes, but is not limited to, cost or labour mischarging, defective pricing, defective parts, price-fixing and bid rigging and product substitution.

Cost or labour mischarging schemes are meant to fraudulently inflate the cost of labour or materials.

Defective pricing occurs when a contractor does not submit or disclose to the buyer cost or pricing data that is accurate, complete, and current prior to reaching a price agreement.

Post-award audits of contractor cost are conducted by specialised procurement auditors to disclose to the buying institutions cost or pricing data that is accurate, complete, and current prior to reaching a price agreement.

Failure to identify such fraud might end up with the buyer receiving defective parts, a defect in design and workmanship, which may cause death, injury or severe occupational illness. Procurement audits are meant to limit price fixing and bid rigging in contracts.

Bid rigging is any activity to suppress and eliminate competition on contracts and is prohibited by Zimbabwe laws.

Competitive process is achieved when suppliers honestly and independently set prices. When collusion exists prices are inflated and the customer is cheated. Increased costs are passed on to the public.

Price fixing and bid-rigging is an agreement where, in response to a call for bids or tenders, one or more bidders agree not to submit a bid, or two or more bidders agree to submit bids that have been prearranged among themselves. They usually fall into one or more of the following categories:

Bid suppression: One or more competitors who otherwise would be expected to bid, agree to refrain from bidding or withdraw a previously submitted bid so that the designated winning competitor’s bid will be accepted.

Complementary bidding: Occurs when some competitors agree to submit bids that either are too high to be accepted or contain unfavourable terms not be acceptable to the buyer.

Such bids are intended to misdirect the buyer and are merely designed to give the appearance of genuine competitive bidding. They defraud purchasers by creating the appearance of competition to conceal secretly inflated prices.

Bid rotation: All conspirators submit bids but take turns being the low bidder. The terms of the rotation may vary from competitors taking turns on contracts according to the size of the contract, or allocating equal amounts to each conspirator, etc.

Subcontracting: Competitors agree not to bid or to submit a losing bid in exchange of a subcontract from the successful low bidder. In some schemes, a low bidder will agree to withdraw its bid in favour of the next low bidder in exchange for a lucrative subcontract that divides the illegally obtained higher price between them.

Sophisticated fraud may include market division or allocation schemes agreements in which competitors divide markets among themselves. In such schemes, competing firms allocate specific customers or types of customers, products, or territories among themselves.

In other schemes, competitors agree to sell only to customers in certain geographic areas and refuse to sell or quote intentionally high prices to customers in geographic areas allocated to conspirator companies.

Almost all forms of bid-rigging schemes have one thing in common: an agreement among some or all of the bidders, which predetermines the winning bidder and eliminates competition. I might sound fictitious, but it is a reality.

Due to non-availability of procurement standards and subsequent certification programmes that I am advocating for, accounting audit are not in a position to reveal such sophisticated crimes.

This has limited exposure of procurement fraud and corruption to mainly cases of non-compliance with procurement laws.

Nyasha Chizu is the chairman of CIPS Zimbabwe branch and writes in his personal capacity. Email: chizunyasha@yahoo.com

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