presence . But he knew that some of his competitors were investing in such activities , and he wanted to keep up with them .
Matt created a shell search engine marketing company called SEMCo with a fancy website and his wife as the company director . He painted SEMCo as one of the top companies on the market and got the owner to approve an inflated quote for SEMCo ’ s services .
Then , Matt engaged a couple of inexpensive contractors to whom SEMCo subcontracted the work for a much lower price than what KitchenCo paid SEMCo .
After a few months , during a networking dinner , the owner met a search engine optimisation ( SEO ) consultant , and when their conversation turned to KitchenCo ’ s SEO initiatives , the consultant was amazed by the price KitchenCo had paid , and stated that he had never heard of SEMCo .
Because of this conversation , the owner asked KitchenCo ’ s finance director to carry out some checks on SEMCo and found out that it was owned by Matt ’ s wife , and that the price KitchenCo had paid was well above the market average .
Case study 3 : GlassesCo
For 15 years , David was the finance director of GlassesCo , a retailer that sold spectacles and lenses . GlassesCo used a small legal firm , LegalCo , and over the year , David got to know John , the owner , quite well .
At a certain point , the two men came to the following agreement : John would inflate the number of hours of consulting provided to GlassesCo , David would approve the inflated invoices , and they would split the fraudulent proceeds . This arrangement was quite easy to pull off because David was the only approver of the invoices .
One day , the CEO of GlassesCo received an anonymous email reporting that David was approving inflated consulting invoices . The CEO engaged a fraud investigator to verify whether the claims were true . By reviewing David ’ s email archive , it became obvious that he was colluding with John in a pay-and-return fraud scheme worth £ 30,000 ($ 37,500 ) over the past two years . Due to the email archive retention period , it was not possible to ascertain whether the loss was even greater ; however , given the length of David ’ s service and for how long LegalCo had been providing services to GlassesCo , it is quite likely that the loss amounted to much more than that .
7 ways SMEs can protect themselves against procurement fraud
Segregation of duties : In all three examples , the lack of segregation of duties made the frauds possible or helped to conceal them . In MediaCo ’ s case , the lack of segregation of duties in the accounting function allowed Jenny to hide the fraudulent payments in the general ledger without anybody noticing . To achieve segregation of duties , responsibility for processing payments should be allocated to a different individual from the one in charge of posting transactions in the general ledger . Another way to segregate duties is to ensure that finance systems require two users to process journal entries : one to post journals and one to release them .
In the second case study , segregation of duties could have been achieved by giving the finance department responsibility for carrying out due diligence on the new vendors . This would have uncovered the shell company fraud scheme before the vendor had been engaged .
In the third case , David ’ s fraud would have been discovered much earlier if the CEO had to approve LegalCo ’ s invoices in addition to David ’ s approval . To ensure that invoices are independently approved , they should be reviewed by a second individual , other than the person who holds the relationship with the vendor .
Robust reviews : In the first case , the fraud was made possible by the poor controls carried out by one of the two managing directors , who did not check the details of the payments against the supporting documents . In the case of KitchenCo , the owner did not perform a thorough review of the vendor selection process carried out by the marketing manager , which resulted in the engagement of a shell company as a vendor . When approving ,