The purchasing function provides the greatest opportunities and temptations for dishonesties that can be resisted solely by one's good conscience, integrity and dedication.

Modus Operandi

Most businesses have recognized the difficulty of effectively controlling their purchasing departments. It is one department where its personnel have the greatest opportunities and temptations for dishonesties that can be resisted solely by one's good conscience, integrity, and dedication.

Some suppliers in their desire to push up sales voluntarily give tempting offers to the person in charge of purchasing in the form of extraneous confidential cash discount that will never reach the coffer of the company. Inasmuch as controls are dependent on recorded data, any unrecorded transaction or arrangement such as confidential purchase discount is beyond review and audit. Under the circumstance, it is therefore extremely necessary to screen thoroughly the purchasing personnel to prevent placing the wrong people in the right places.

In one corporation for instance, the purchaser of suppliers for an additional ten percent confidential discount in return for exclusive patronage. The supplier was not contented with his increased volume of sales so he conspired with the purchaser and the receiving clerk to raise the quantities in his delivery receipts. This method allowed the supplier to recover all the cost of discounts and more. To complete the improper transaction, the purchasing manager confirmed the purchases on the purchase order form of the company based on the raised quantities. He had to antedate the purchase order to avoid detection. The supplier was the richer by the amount of supplies that never reached the storeroom of the company. Moreover, to give more business to the supplier an excessive number of supplies was requisitioned. The scheme went on for years before it was detected.

Detection and Prevention

The raised quantities of supplies purchased and paid for by the company were detected when at one time the internal auditor reviewed thoroughly the cash vouchers and supporting invoices and delivery receipts of the supplier. There were many erasures on the delivery receipts of the supplier. To prove that the quantities delivered were inflated, the ending inventory of supplies was taken and added to the total issued during a certain period. Then from the total, the beginning inventory of the same period was deducted. The resulting balance which should be the total purchases during the same period was very much less than what was actually invoiced by the supplier. The inventory taking also revealed the large stocks resulting from the excessive requisitioning for supplies. Confronted with the findings, the receiving clerk and the purchasing manager finally admitted the anomaly and were therefore severely disciplined.

Background investigations of the above employees showed that they were not living within their means. A claim was raised against the supplier for the cost of supplies paid not delivered. Later, the erring supplier was blacklisted.

The company consequently adopted a number of corrective measures to prevent recurrence. A manual was prepared for the company's purchasing policy, code of ethics and penalties for their violations. They were made known to all purchasing policy, code of ethics and penalties for their violations. They were made known to all purchasing personnel and vendors. Compulsory full yearly vacation leaves were enforced among all purchasing employees. Whenever practicable, the purchasing function was rotated among other key executives to discourage anomalies. To get the best price, quality and service, substantial purchases of goods and services were delegated to an uninterested and uninfluenced bidding committee. As a guard against unauthorized purchases, preparation of confirming purchases orders was stopped except on emergency purchases. Frequent surprise audits of all purchasing transactions deviating from standard operating procedure were done to forestall improprieties.