Procurement

Purchasing goods and services, and contracting external suppliers are everyday tasks in the public sector. Recent IBAC investigations and reviews have exposed how procurement processes can be vulnerable to corruption. From this work, IBAC is able to share our insights on the red flags that may show procurement processes are being corrupted and public monies misused.

Red flags of corruption

The bidding process

Employees

  • Writing tender specifications in a way that favours a particular supplier
  • Frequently using exemptions to circumvent competitive procurement
  • Frequently extending contracts
  • Accepting late or suspicious bids
  • Not declaring connections with bidder (eg family member or friend), as well as actual or perceived conflicts of interest
  • Accepting offers of gifts, benefits or hospitality
  • Releasing sensitive information (eg tender specifications) to a particular bidder

Suppliers

  • Submitting suspicious bids (eg fake companies, subsidiaries, shell companies or affiliates) to give the appearance of competition
  • Not declaring connections with another bidder (eg same names, contact details)
  • Submitting bids that vary significantly from others
  • Offering gifts, benefits or hospitality

Picking the preferred supplier

Employees

  • Selecting a supplier who bid well above the expected cost
  • Repeatedly awarding contracts to the same suppliers
  • Not declaring a conflict of interest in tender/quote evaluation process
  • Favouring getting procurement done quickly over following proper process
  • Not maintaining appropriate paperwork, including documentation of decisions
  • Not submitting the appropriate paperwork to support approval of supplier
  • Undertaking all duties by themselves (ie one person determines tender requirements, selects supplier, raises purchase order and approves payments)

Suppliers

  • Hiring a losing bidder as sub-contractors
  • Complaining about selection process or lack of competition

Paying for goods and services

  • Employees raising purchase orders after invoices have been received, or not at all
  • Suppliers submitting false, inflated or duplicate invoices, or sloppy invoices with insufficient detail or obvious mistakes

Delivery of goods and services

  • Not receiving goods and services
  • Receiving poor quality goods and services
  • Receiving community/staff complaints about the quality of goods and services

Contract management

  • Splitting contracts to avoid the need for a certain number of quotes or a tender process, or to keep purchases within a particular financial delegation
  • Varying contracts, eg expanding projects to go well above expenditure thresholds

Suggested control measures

Audits and checks

  • Conducting regular and random audits to look for trends and patterns
  • Conducting sample audits to check veracity of invoices, and whether goods and services have been delivered
  • Checking quality of goods and services
  • Checking invoices against prices in the contract
  • Auditing employee access to sensitive tender information

Conflicts of interest

  • Establishing framework for employees to manage conflicts of interest, including declaring then reviewing identified conflicts at each relevant stage of the procurement process
  • Rotating employees in high-risk positions
  • Segregating duties at various stages of the procurement process – eg use different people to approve and receive goods/services

Processes and controls

  • Conducting due diligence to establish legitimacy of suppliers (eg checking details on tenders and quotes, conducting ASIC searches to identify possible links between prospective suppliers and employees, or whether entities have appropriate assets or business facilities)
  • Checking financial delegate paperwork is complete before approving expenditure
  • Controlling sub-contracting processes
  • Monitoring tenders and contracts to detect contract splitting
  • Requiring staff to sign invoices to verify goods and services have been received
  • Ensuring controls exist in payment systems to detect duplicate invoices
  • Maintaining robust contract management and oversight to enforce contractual terms, milestones and deliverables
  • Monitoring variations in contracts and project scope after approval

Staff training

  • Conducting regular training and staff development
  • Ensuring staff involved in the procurement process are familiar with the concept of total cost of ownership

Complaint management

  • Encouraging reporting of suspicious activities among staff and suppliers
  • Investigating staff and community/business complaints appropriately and expanding investigations to look for other suspicious activities

Case study: oversupplying for personal gain

An irregularity noticed while processing invoices was reported to the CEO at the City of Stonnington, who called in a private consultant to investigate.

The investigation uncovered how an employee within the facilities team had been over-ordering alcohol, then on-selling the surplus stock for personal gain. He did this by distributing alcohol costs across a range of council cost centres, deviating from procedure while keeping below his financial delegation of $6000 so as to not raise the alarm. The employee was suspended as soon as the fraud was detected.

The total detected frauds were more than $620,000 over at least five years. In November 2014, the offender was sentenced to three years and 11 months jail (with a non-parole period of 18 months).

The council has since implemented a Fraud Control Plan in addition to its existing Fraud and Corruption Control Policy. Staff are now subject to ongoing fraud awareness training, reinforcing the importance of reporting suspicious behaviour.

“The key lessons learned include that bulk, saleable items (such as alcohol) should have a double accounting process applied. Fraudsters identify the on-selling opportunity and will find ways around robust processes to increase their income or power. Procurement policies and structures that grant permission for delegated employees to order and expend funds should have their approvals tested from time to time to ensure compliance. This should include the CEO who is often left without a double accounting process due to their ultimate powers.”
City of Stonnington Manager, Risk Management and Contracts Compliance, Bernard Mulholland

Note: This case study has been produced with permission from the City of Stonnington based on an investigation they conducted.