Forensic Audit of the Purchase Department in a Hospital: Risks and Mitigation

Author: Ragavender S

Forensic audits are crucial in uncovering and preventing fraud within organizations. Hospitals, with their complex procurement processes and high-volume transactions, are particularly susceptible to financial and material fraud. This article explores the forensic analysis of a hospital’s purchase department, emphasizing the fraud triangle and related risks.

The Fraud Triangle

The fraud triangle—comprising pressure, opportunity, and rationalization—is a model used to understand and analyze fraud:

1. Pressure: Financial, personal, or professional needs compelling an individual to commit fraud.

2. Opportunity: Weak internal controls or oversight gaps providing a chance to exploit the system.

3. Rationalization: Justification by the perpetrator to legitimize their fraudulent acts.

Common Risks in Hospital Purchase Departments

1. Manipulation of Quotations for Favored Vendors

   • Modus Operandi: A purchase manager collaborates with a favored vendor to tailor quotations to suit their bid, often ensuring the vendor wins contracts at inflated rates. The manager may receive kickbacks as commissions.

   • Red Flags:

     • Frequent selection of the same vendor despite other competitive options.

     • Purchase orders (POs) at significantly higher prices than market rates.

     • Absence of detailed comparative analysis during vendor selection.

   • Mitigation:

     • Implement stringent vendor selection processes, including competitive bidding and regular market rate benchmarking.

     • Use audit trails in procurement software to trace decision-making processes.

2. Siphoning Products with the Store Manager

1. • Modus Operandi: The purchase manager and store manager collude to divert products, particularly free samples or products provided by vendors as part of agreements.

   • Red Flags:

1. • • Discrepancies between stock received and stock recorded in inventory.

     • Unusually high stock adjustments or write-offs.

     • Anonymous complaints about missing or unaccounted products.

   • Mitigation:

     • Periodic inventory audits with surprise checks.

     • Segregation of duties between purchase, receiving, and store management functions.

     • Use of digital inventory management systems integrated with procurement data.

2. Creation of Fake Vendors

   • Modus Operandi: The purchase manager sets up fake vendor entities, often operated by themselves or associates. These vendors supply goods at inflated rates or substandard quality.

   • Red Flags:

     • Newly onboarded vendors with incomplete documentation or suspicious details.

     • Multiple vendors sharing the same contact information or bank details.

     • Unexplained increase in procurement from lesser-known or newly added vendors.

   • Mitigation:

     • Rigorous due diligence during vendor onboarding, including site visits and verification of tax IDs and licenses.

     • Cross-checking vendor details against public records and sanction lists.

     • Regular forensic data analysis to identify anomalies in vendor patterns.

Leveraging Forensic Audit Techniques

Forensic audit procedures can effectively address these risks:

• Data Analytics: Using tools like Benford’s Law to detect anomalies in procurement and payment patterns.

• Digital Forensics: Investigating email trails and digital footprints to uncover collusion or fraudulent activities.

• Document Verification: Reviewing contracts, invoices, and POs for inconsistencies or forged elements.

Conclusion

The purchase department in a hospital plays a pivotal role in its operations but also presents significant fraud risks. A robust forensic audit framework, combining data-driven insights, strengthened internal controls, and regular monitoring, can mitigate these risks and foster a transparent procurement process. By understanding the fraud triangle and implementing proactive measures, hospitals can protect their financial and reputational integrity.