1 Introduction

When someone is asked to describe 'collusion', a typical response may involve a scenario where firms are working together to fix the price of a product across a market. But the risk of collusion internally or with suppliers should be on the radar for every business.

The 2016 Report to the Nations of the Association of Certified Fraud Examiners ('ACFE') shows that collusion occurs almost as frequently as fraud is committed by a single employee; and that, on average, the more people involved, the bigger the financial loss.

The good news? While collusion is a real risk, there are things that you can do to help prevent or detect it. There are some solutions that are relatively easy and cost-effective.

2 What is collusion?

Collusion is a secret agreement or cooperation between parties for illegal or deceitful purpose. It can come in different forms, including bribery and corruption, or fraud. The risks to an organisation can originate from internal or external sources, or a combination of both.

Here are two simplistic examples showing how external and internal parties can collude to defraud an organisation.

3 Real-life collusion

The story of Dr Esra Ogru 1 is a real-life example of collusion.

Dr Ogru was the co-CEO of an Australian biotech company. She colluded with two colleagues to defraud her employer of more than $6.1 million between 2004 and 2013. This was done through false invoicing and credit card reimbursements.

Dr Ogru and her colleagues were in positions of authority which allowed them to approve false invoices from entities that they controlled. As co-CEO, Dr Ogru knew the amount to invoice without raising suspicion and was able to approve the invoices. The money received was then divided between the three individuals.

The scheme was finally detected by the CFO who started questioning invoices from one of the entities. Her concerns were raised with the audit committee and investigations were conducted.

When the case ended, the other co-CEO acknowledged that "the company' s internal checks and balances should have been better." 2

4 How serious is collusion?

ACFE's 2016 Report to the Nations shows that:

  • Nearly half of reported fraud cases involve collusion.
  • As the number of people involved gets higher, so does the average loss.
  • When the number of perpetrators increases from just one to two, the average loss rises nearly two-fold.
  • When the number of people increase from four to five (or more), the average loss rises by more than two fold.
  • More cases involve five or more people than either three or four people.

5 What can you do to combat procurement collusion?

Relevant to procurement, there are two approaches: preventive and detective, as set out below:

In the examples set out earlier, the risk of collusion could have been reduced:

  • The external collusion scenario – by conducting a strict tender review process or due diligence on the supplier.
  • The internal collusion scenario – by conducting due diligence on the suppliers, with a review committee approving new suppliers.
  • The real-life example of Dr Ogru – by conducting a due diligence on the suppliers recorded and stringent regular checks on supplier invoices and employee credit card claims.

6 Conclusion

The repercussions of collusion can be significant, not only to a business' s operations, but also to its reputation. Tightening internal controls will mitigate the possibility of collusion.

An employee guilty of collusion is typically in a position of trust or authority , which helps in defrauding the employer. The steps outlined above can be implemented without undermining that trust, but reduce the risk and impact of collusion.

In our experience, no single policy or control works in every organisation, but the principles are universal.

Footnotes

1 See: http://www.austlii.edu.au/cgi-bin/sinodisp/au/cases/vic/VCC/2014/2015
See: http://asic.gov.au/about-asic/media-centre/find-a-media-release/2014-releases/14-296mr-former-ceo-and-two-melbourne- men-jailed-following-theft-of-millions-from-phosphagenics-limited/
See: http://www.brw.com.au/p/leadership/the_tale_of_esra_ogru_high_flyer_JDF3sYnwwdzUhZ6d8bXKVN

2 http://www.theaustralian.com.au/news/health-science/esra-ogru-scientist-saleswoman-and-majorleague-scammer/news-story/5 994c09b58ba91bcdcd29ec8ccfb3ee6

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.