Abstract
With many organizations continuously opting for suppliers from the emerging markets, the opportunity for potential fraud and corruption is rising every day. This claim is evident in the case of public procurement. Fraud and corruption may take different forms.
The basic understanding of fraud is the intention by a person or group of people to deceive another by means of misrepresentation of fact.
This parody may be done through conduct or concealment of data that needs disclosure to deceive the individual entity while basing the actions on misinformation. Such a deception exposes the individual or entity to damages after relying on the misguided information.
This vice can occur at any or all phases of the process or cycle of procurement. Movement of personnel between the public and private sector increases the potential risk of procurement fraud, especially in the public procurement process.
Derailment of the growth of the American economy has been largely the result of fraudulent procurement processes. The situation is complicated further by the fact that a tight regulatory framework serves to promote the vice in some instances.
This situation poses a dilemma to some policymakers whose intentions are genuinely intended to regulate the vice.
Although a lot of research has been conducted on the topic of corruption and fraud, there has been minimal effort in conducting a specific investigation that focuses on the effect of this vice in procurement on the performance of the United States economy.
This paper seeks to dig deeper into the issue of procurement fraud. It aims at showing its effect on the performance of the national US economy with the intention of triggering further empirical study into the issue.
Introduction
Current trends show that many companies around the world prefer suppliers from low-cost regions. According Reffett (2011), there is also an immense financial pressure resulting from the increasingly volatile economic environment.
These factors cause a lot of pressure on firms. Such a strain makes some of them seek ingenious ways of maximizing their gains.
One of the major areas where they try to capitalize their gains on is procurement. Procurement fraud is a potential risk to many companies across the world irrespective of their size. Moreover, research suggests that procurement is one of the areas that are most vulnerable to corruption or fraud.
Even though procurement fraud is a phenomenon that is more common in the private sector, it is becoming rife in the public sector, with the initiator in this case being either the supplier in the private sector or a public officer who is tasked with awarding the tender or contract.
The losses due to procurement swindle in businesses in the US stands at almost 10 percent of all the returns. This situation affects negatively the firms’ ability to achieve their goals. Notably, mobility of the workforce contributes to fraud and its effects.
A tight regulatory system promotes the actions of fraudulent characters. The public sector is the most affected by fraud.
Lastly, poor people are the worst hit by the effects of fraudulent procurement. Despite these grave consequences of fraud and corruption, it is regrettably notable that this issue has not received its deserving presentation in academic research.
This paper intends to explore the issue and its effects on the American economy.
Types of Procurement Fraud
There are about seven basic types of fraud in the procurement.
The first one is misrepresentation, which is mainly done through document forgery.
In this case, misrepresentation of the company’s details regarding the turnover, directors, ownership structure, and the management takes place to avoid unearthing conflict of interest that may lead to disqualification from participation in the tender.
The second type is collusion in the tendering process that takes place between the bidding company and the staff of the organization that is issuing the tender. Collusion results in kickbacks and bribes.
In fact, it is a common occurrence where weak controls exist, especially in cases that involve government departments, thus prompting entities that demonstrate unethical conduct to make gains out of this loophole.
The third type involves falsifying claims and statements during the tendering process. It includes lying about fulfillment of the requirements for qualification to participate in the process of bidding (Green & Reinstein, 2004).
The fourth is a case of substitution of goods for those of defective quality instead of those stated in the tender.
The fifth form is that of price fixation through collusion with some of the competitors to ensure a win in the bidding process for the colluding partners.
The next type is one of the worst forms of fraud. It leads to a huge cash loss since it involves awarding of tenders to firms that never applied for the tenders.
The assumption is made that the company to which the tender was awarded performed the required task based on false invoices with corrupt officials who make the payments against the false invoices.
The last type is price inflation, which is common in tenders that involve pharmaceutical, water purification, and chemical products. Once the contract is operational, the corrupt officers who enabled the tender to go through receive rebates from the company that has won the tender.
Mobility of the US Workforce and its Effects
Increased mobility of staff from the public to the private sector and vice versa increases risk of fraud in the US. One cannot ignore the fact that the US private sector is endowed with great expertise than can be of great value to the public sector.
However, it is apparent that the increased movement of personnel from the private sector to the public sector and likewise from the public sector to the private sector heightens the risk of fraud.
In the US, public servants who take up employment opportunities in the private sector need to depict exemplary ethical standards (Persons, 2006).
The senior American army retirees depict a behavior of taking up lobbying jobs in the private sector within the first two years of exiting the military. Their conduct is obviously an act that is below the expected standards for officials of their status.
The inside information that such former public servants have on the government can make them act in a way that promotes fraud by giving out information that gives private firms an advantage over the government.
This situation amounts to fraud, which calls for stricter controls to guide the entry of initial public employees into the private sector.
There are cases where individuals working in government departments get appointments in the private sector with the US firms that have initially won major tenders with these departments. This raises doubts on the conduct of these former public servants (Zahra, Priem, & Rasheed, 2007).
Such occurrence of events points out to possible incidences of fraud. This fraud may make the government department face huge challenges in achieving its objectives. In fact, it is likely to have a ripple effect on the performance of the American economy.
An explanation of this ripple effect can be found in the fact that the US government departments usually play a role in smoothening public sector functions.
Another common form of fraud takes place when officials who work in the public sector or politicians institute policies or other expenditure decisions that are in favor of specific suppliers or industries with the aim of making private gains.
Such fraud is common across the globe. It presents a challenge to the US as well as other countries since it is sometimes very difficult to detect upon considering some of the forms in which the rewards come. Rewards may come in the form of job opportunities to family members.
They may also be in the form of delayed gifts or cash payment, thus making it hard for one to connect the policy decisions with the beneficiaries and the rewards.
Effect of Procurement Fraud on the Poor Class
Effects of corruption mainly hit hardest on the poor people (Persons, 2006). The poor class is more vulnerable to these effects due to its overreliance on government subsidies for many of its basic needs.
Corruption diverts away funds that are desperately needed to provide for healthcare, education, and other kinds of public services to the pockets of corrupt individuals.
Real development does not just imply an increase in the gross national product, but rather an increase in the gross national product that is accompanied by an improvement in the living standards of the country’s citizenry.
This means that the inability of the government to ensure equal access by all American citizens to basic commodities leads to stagnation of the economy in terms of development.
When many people encounter a situation of roadblocks while accessing these basic commodities, it can negatively affect their productivity immensely. Worth noting is the fact that many of the low-class US citizens contribute a lot to the economy in terms of labor.
In fact, they are the main drivers of the various sectors of the economy. The UN recognizes that corruption is a major drain to the national economy because it drains money from efforts that are directed at reducing poverty and/or ensuring distributive justice.
If one can trace and reinvest back into the economy the money that is acquired through fraudulent ways and/or stashed in foreign accounts, he or she is likely to experience a heightened level of economic activity.
Procurement Fraud higher in the US Public Sector
Large expenditures on the part of the US government provide a good environment for fraudulent dealings since it is sometimes hard to trace specific details regarding all public expenditure transactions that are carried out in the economy (Wong et al., 2013).
The huge funds also magnify the effect of these fraudulent dealings within the economy so that nearly each sector feels the impact. The United States government shares in this fate of fraudulent dealings during procurement in its public sector.
This issue of fraud needs to be addressed early enough if the government is to avoid a significant negative impact it has on procurement performance on the public sector.
Although the amount spent on public expenditure may seem a lot, the funds are insufficient in most cases upon considering the size of the economy and the various needs that are to be fulfilled. Fraudulent procurement deals usually squander these limited resources.
Such deals also put the country’s security at risk by making it vulnerable to external attacks, especially where substandard military tools are acquired through wrong procurement procedures that tend to favor certain suppliers over the more genuine ones.
Fraudulent dealings also amount to cheating of taxpayers who work so hard to ensure that the government gets enough revenue to carry out its functions. As a result, the government is unable to acquire the goods and services that are necessary for it to accomplish its goals and objectives.
The cost of rogue procurement deals spreads to the public in different forms such as the chance rate, difficulty on the side of clients, unreasonably elevated charges, and deceptive ways that result from illegal actions.
The major global bodies such as the IMF and the World Bank together with opinionated dealers and legislators concur in terms of the impact of fraudulent procurement deals on the growth and development of the US economy. They recognize that it derails the process of development. It leads to economic stagnation.
The political field suffers a tainted image with achievement of individual political milestones based on one’s extent of involvement in fraudulent practices. Such a scenario will influence negatively any decision-making processes regarding resource allocation (personnel, goods, and services).
The relationship between corruption and development is a negative one. Fraud reduces the level of trust that individuals have on each other. With time, they may start viewing each other with suspicion. The long-run effect of this situation is instability in America’s economic and political institutions. Such volatility slows its economic progress (Wong et al., 2013).
Tainted Country’s Image
When procurement fraud becomes rampant, it may also have serious ramifications on the relation between the US and other countries. This case may certainly affect negatively the performance of the United States economy. Some tenders are usually government-oriented.
Therefore, government enterprises from other countries also participate in the bidding processes of the American tenders (Cockrell & Stone, 2011.). When the government of a given country participates in the bidding process for American tenders, it expects transparency at all stages of the tendering process.
Any feeling of discrimination or favoritism of a specific party is bound to damage the dependence it may have on the US. This scenario will affect the good relations subsisting between the two countries. Economic partnership between the two countries will probably experience an irreparable damage.
Efforts by the US to revive the economic ties between it and other countries may be viewed with suspicion. This circumstance will set a bad precedence that may affect future engagements with other countries.
America’s future generations will be forced to bear the risks associated with a tainted image of the procurement procedures. Such a situation will be a great disservice to such innocent persons as it denies them the opportunity to determine their own fate.
The effects of tainted image may also come to haunt the American government when applying for tenders in some of these countries. This drawback will serve to limit its national income while at the same time impeding its economic prospects.
The population is also likely to suffer in equal measure (Zahra, Priem, & Rasheed, 2007). Individual who seeks to live and work in some of these countries may be discriminated by virtue of their nationality. The feeling of hatred towards Americans by some countries is on the rise in some countries.
For this reason, the country cannot afford to let the lack of transparency in its procurement process heighten this problem any further. Moreover, it is only fair that all stakeholders work towards eliminating this vice to improve the country’s image.
Tight Regulatory environment as a Promoter of Fraud
Influential thugs in the public segment maximize their gains by using the perceptible authenticity of their workplace to carry out fraudulent procurement affairs by misusing their supremacy.
They shamelessly extract corrupt deals in different forms or unswerving some of the government tenders to companies that they, or their close family and friends, manage and from which they get profits (Green & Reinstein, 2004).
They may control the environment by shaping it to suit their interests by influencing the regulatory framework. They may increase the regulations governing various procurement and business processes.
This situation will certainly lead to a higher number of defaulters since not so many people will be able to meet the minimum requirements contracts.
Elites in the private sector also have ingenious ways of ensuring that they make illegal gains from procurement deals. They are able to benefit by bribing public officials into instituting some modifications to the procurement environment to secure their private interests.
For instance, a private party may collude with public officials to have single-source or no-bid contract (Petty, 2013).
Private sector elites influence the environment in a way that safeguards their interests in three traditional and apparently legal ways, which include lobbying, political action committee, and campaign contributions.
Bearers of elective positions are usually left at the mercy of their financiers who require their demands to be met.
As a result, their firms may be given undeserving advantage over their more genuine competitors despite the fact that they may have inflated their prices or that they deal in substandard goods that do not meet the minimum threshold (Cockrell & Stone, 2011).
The effect of this case is misuse of taxpayers’ money. The malpractice impedes the achievement of the national economic goals and objectives.
Recommendations
To combat fraud, several key areas are of concern to the US government. They include heightened political accountability, creation of a competitive private sector, strengthening the participation of the civil society, and institutional means of restraining power.
Achieving accountability will be possible if institutions are put in place bearing the authority to impose sanctions to restrain the conduct of public officials.
Increased accountability will deter misconduct since officials fear public embarrassment and/or an irreparable tainted public image that may make other people shun them.
There is also a need for greater scrutiny of financing that is accorded to political parties. Each applicant who is aspiring to run for an electoral position should find the involved procedure reachable and inexpensive to him or her.
This strategy will curb biased financing in which some financiers avail conditional funds to candidates of their choice. Inability to stop illegal candidate financing should be compensated by close monitoring of donor activities to ensure that transparency exists (Best, Ladewig, & Wong, 2013).
The public also needs to be motivated to ensure that public officials give an account of their actions. There is a need for greater media liberty and admission to information under the supervision of the authority. This move will bring about a vibrant and motivated civil and public society.
Competition in the private sector needs enhancement through lowering or removing some of the entry barriers to encourage more firms into the market. In the process, this tactic will discourage monopolies that make wrong use of their dominance.
There should be transparency in the ownership structure (Mohd-Sanusi, Mohamed, Omar, & Mohd-Nassir, 2013). This will open people up to any undisclosed agendas.
Dealing with corruption effectively will require stakeholders in the private sector, especially those in the banking sector, to ensure that money from fraudulent procurement deals is not stashed in overseas bank accounts, as is usually the case.
Another key factor will be the independence of the judiciary, which should also be effective. Nevertheless, judges need to portray integrity and adherence to work ethics. Legislation that is intended to punish those implicated in corrupt practices should be timely.
It should take immediate effect without favoring any specific individuals. Blacklisting of firms that are found participating in procurement malpractice may also work to discourage and deter other potential lawbreakers.
Conclusion
Corruption is rife in both the private and public sector. There is a great worry in terms of its impact on the global status of administrative units. In the US, fraudulent dealings take place in both high and low offices in secret meetings that are conducted behind closed doors. The vice is still rampant.
Only its form has changed to become more multifaceted, especially with the amplified status of knowledge. The various reforms that are carried out by the government in conjunction with the private sector seem not to have borne fruits due to the changing forms and channels of fraud.
This research paper has been geared towards providing a theoretical understanding of the relationship between procurement fraud and the performance of America’s economy.
Limitations
This research, just like many other studies of its kind, has several worth mentioning shortcomings. Firstly, literature review forms the main basis of this research, thus making it more of a theory as opposed to an empirical study.
This means that most of the content presented herein may not have been empirically tested to ascertain the relationship between the various mentioned variables.
Future study calls for experiential examination that will focus on determining the potency and the state of the association between bribery in public procurement process and the status of the national financial system.
Further investigation or study into this issue should also give priority to ways of developing mechanisms that are practical, focused on minimizing, or possibly doing away totally with fraud when it comes to procurement practices.
Considering the contribution of technology to the complexity of fraud in the modern times, future researchers into this issue will need to look at the most appropriate ways of approaching the issue of corruption in the process of procurement in both the private and public sector due to the negative impact it has on the economy.
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