Avoiding Conflicts of Interest
Updated: Sep 29, 2020
Conflicts of interest are often identified as a form of corruption and are viewed as violations of a company’s ethics and compliance policies. These acts are to be considered fraudulent behavior that can involve those at the top as easily as lower-level staff employees. For our discussion, we will use both the A/P and purchasing department. Examples of conflict of interest in vendor relationships include:
Company employees that have a close or familiar relationship with a key vendor employee. For instance, receipt of even a simple gift from a vendor by an employee in the procurement department could be considered a conflict of interest. What raises attention is the custom golf clubs, expensive dinners, or trips to resort destinations. The costs of these extravagant gifts do not come without a price, and that is the vendor's "Entertainment" costs are built-in resulting in your company paying a higher price for goods and services.
The vendor may have a financial interest (possibly a shareholder) in another company that is an actual or potential competitor of yours.
Improper billing. This is where billing charges exceed industry standards. Using equipment rentals as an example, billing at a weekly rental rate is obviously going to be higher than the monthly rental rate. Don't pay the vendor for 4 weeks at the premium weekly rate if, when the monthly rate would've gotten you a free week!
Not disclosing that immediate family members or relatives are employed by the vendor. Speaks for itself. If your employee has "not" disclosed the fact that their spouse, family member, or relative works for a specific vendor, that in itself presents a problem.
According to the ACFE 2020 Report to the Nations fraud involving corruption was responsible for 33% of the total cases reported. In manufacturing, corruption accounts for 50% of the occurrences with a median loss of $198,000 and a duration of the fraud lasting 18-24 months.
One answer is to conduct compliance examinations in-house and with vendors. The ACFE reports that together, most businesses have demonstrated a one-third reduction in overall losses.
Thanks again to B. Ray Mize, retired Auditor, and author of Vendor Audit who took the time to share with me how he and his team from Ocean Drilling & Exploration conducted vendor audits, which in many cases involved conflicts of interest.