Invoice fraud in Australian Local Govt.

In October 2012 the (Australian) NSW ICAC published its report INVESTIGATION INTO ALLEGATIONS THAT STAFF FROM A NUMBER OF LOCAL COUNCILS AND OTHER PUBLIC AUTHORITIES ACCEPTED SECRET BENEFITS FROM SUPPLIERS AND THAT STAFF FROM TWO LOCAL COUNCILS FACILITATED PAYMENT OF FALSE INVOICES FROM SUPPLIERS (www.icac.nsw.gov.au).

This report made 15 corruption prevention recommendations and “…while the recommendations are mainly aimed at local councils, the Commissions considers that other public authorities can also learn from this investigation and they are encouraged to read this report and the recommendations contained herein.” Of the 15 recommendations made in the final report, 3 have special significance and implications for procure-to-pay (P2P) technology. This whitepaper seeks firstly, to draw out these implications in more detail, secondly, expand upon these implications and identify the technology components with more granularity than The Report. The fraud identified in the report cost the agencies involved over AUD$750,000.00 from the payment of false invoices alone.

The 3 recommendations with specific implications for P2P technology are:

Recommendation 7: That councils, if they have not already done so, analyse their procurement processes to identify points of corruption risk and take steps to improve the design of their procurement processes.

Recommendation 8: That councils, if they have not already done so, consider introducing e-procurement as an efficient method of controlling possible vulnerabilities in their system.

Recommendation 9: That councils, if they have not already done so, review which reports are available to the managers of stores and ensure they (councils) can generate a report showing the orders placed by any individual across all cost centres.

‘Systems thinking’ maintains that there are 3 components to any systems with human interaction; People, Process & Technology. It is acknowledged that each of these components play an equally important role in ensuring an optimum system. This paper focusses on the technology component only.

The role to be played by e-procurement & P2P technology within councils can be segmented into 3 specific areas as follows:

1. Electronic Invoicing (‘E-invoicing’);
2. Supplier portals and electronic supplier catalogues; and
3. Electronic workflows and approvals.

1) E-invoicing is the transfer of procurement and finance function related documents in a standardized machine-readable format between ‘buyer’ and ‘seller’. It has application to business-to-government (B2G), government-to-government (G2G) business-to-business (B2B) and business-to-consumer (B2C) transactions. E-invoicing is NOT the sending and receiving of procurement and finance function related documents in PDF or Word (or similar) document formats.

E-invoicing is in common usage throughout the world. In most countries an e-invoice holds the same or similar legal status to a paper invoice - albeit with some important exceptions and variations. In many countries throughout the world e-invoicing is mandated for B2G transactions and in others e-invoicing is more common than paper or electronic paper documents for this purpose, despite not being mandated.

E-invoicing severs the link between swift, error free, and compliant processing (in Finance and Procurement) and the need for human intervention. In this sense it is truly a disruptive innovation development and – “… puts the lie to the traditional notion that you always have to pay more to get more”. 

Politicians and their constituents; special interest groups; and public and private sector managers, are increasingly looking at promoting the use of e-invoicing because of its advantages over the paper-based alternative. E-invoicing reduces the cost of financial processing (USD $450,000,000.00 per annum in the US market alone) (US Treasury, 2011) is environmentally friendly (12 million trees per annum could be saved in Europe alone if all invoices not already received in electronic form, were e-invoices) (Koch, 2011); cuts red tape; improves data quality; reduces the chance of fraud in the first instance and makes fraud more easily detected in the second.

E-invoicing reduces the chance of fraud in the first instance and makes fraud more easily detected in the second. It does this by:

1. Providing a ‘single point of entry’ to a council for incoming invoices;
2. Providing a ‘single point of transmission’ from a council supplier; of purchase orders;
3. Capturing an electronic, secure audit trail of incoming invoices, and outgoing purchase orders; and
4. Enabling the use of eSignatures to digitally ‘sign’ procurement/finance related documents entering and leaving the organisation.

2) Supplier Portals enable secure and error free communication between buyer (council) and seller while capturing a complete electronic audit trail of this communication. Supplier portals which are typically provided free of charge by eProcurement vendors, provide a ‘levelling’ of large and small supplier communications capability, enabling all suppliers to be treated equally.

Portals also serve to provide a simple mechanism by which pre-approved electronic supplier catalogues can be made available internally to council staff, with pre-approved pricing in place from pre-approved suppliers. This mechanism not only ensures maximum ‘spend under management’, but minimizes the opportunity for fraud to take place within councils. ‘Rogue’ or ‘maverick’ spending is also reduced, and business rules put in place to embed council approval requirements. Supplier Portals and electronic supplier catalogues reduce the chance of fraud in the first instance and makes fraud more easily detected in the second by:

1. Providing a ‘single point of entry’ to a council for incoming invoices;
2. Providing a ‘single point of transmission’ from a council of purchase orders;
3. Capturing an electronic, secure audit trail of incoming invoices, and outgoing purchase orders to and from council;
4. Enabling the use of eSignatures to digitally ‘sign’ procurement/finance related documents entering and leaving the organisation.
5. Enabling councils to treat all approved suppliers equally, regardless of their size
6. Enabling councils to enforce a single purchasing regime for all suppliers

3) Electronic workflows and approvals enabled by P2P/eProcurement technology, remove potential fraud vectors by enforcing the business rules relating to spend limits (delegations), ensuring that approval processes cannot be bypassed, and also capture a complete, secure electronic audit trail of approvals and workflow steps.

A fit-for-purpose eProcurement system, implemented as part of a procure-to-pay system addresses the 3 Commission recommendations identified above by embedding procurement best practice in the day-to-day operations of council procurement processes, and, by capturing a complete electronic audit trail, enables extremely granular levels of reporting on these procurement activities.