The Business Times, Friday, September 21, 2012

EDITORIAL & OPINION 31

Having clear procedures to keep procurement fraud at bay

But the real effectiveness of systems and controls hinges on people and the ethical decisions they make
By PERRINE OH

ECENT reports have cast a spotlight on lapses in the government procurement process. These findings can apply to any organisation and serve to remind us of the need to remain vigilant, even when systems and controls are in place and appear effective. The real effectiveness of an organisations systems and controls hinges on its people and the ethical decisions they make. With increasing pressure from global competition, increased regulation and higher costs, the procurement function in every organisation plays a critical role in value creation, with an impact on the bottom line. It serves to ensure the organisation obtains the best value-for-money in procuring goods or services. The key stages of the procurement cycle start with the sourcing and selection of vendors, followed by the delivery of goods or services procured and, subsequently, vendor payment. While lapses in controls are not synonymous with fraud, such lapses may make an organisation more susceptible to fraud.

intentionally or unintentionally be accorded to an existing vendor through short tender periods that do not appear reasonable to others. From a procurement standpoint, the inertia to change vendors may be due to the mindset of if it is not broken, why fix it?.

Fear factor
This may be particularly true for services, where the fear of a new vendor failing to deliver outweighs the perceived benefit. However, such concerns can be managed by performing sufficient due diligence, such as reviewing the vendors track record, before selection of a new vendor. The failure to continually identify alternative vendors that may be able to provide the same product or service, at similar or better terms, may result in less value-for-money for the organisation. Further, having a larger pool of vendors help reduces over-reliance on any particular vendor. In the case of waiver of competition, exigency may be commonly cited. However, clear guidelines should be set and the tone from the top should be clear that frequent waivers are not encouraged and better project planning is required to minimise abuse of urgent requests. Even though waivers may be approved, the relevant authority may need to determine if the excessive use of waiver of competition circumvents the usual procurement process and leads to uncompetitive pricing. During the selection process, it is important to rigorously assess the potential new vendors. Regular assessment of vendors should also be conducted to assess their ongoing business relationship with the company. As a best practice, employees, including senior management, should perform checks and declaration of conflict of interest on a regular basis. In cases where there is an actual and/or perceived conflict of interest, the party involved should formally declare the conflict and not be involved in the selection of vendors. Policies regarding conflicts of interest should be formalised to minimise situations where employees may be tempted to act in their own interests. Although these may not totally eliminate irregularities in procurement,

Daunting task
Third-party collusions and increasing sophistication of procurement fraud cases make detection more complicated. Insider perpetrators often know the policies and procedures of their organisations well enough to exploit the loopholes by covering up with form over substance while some have the power to override the existing controls. A key principle to ensure robust internal controls is the segregation of duties among those involved in the procurement process. With this in mind, what are the other best practices and potential red flags that management can adopt at the various stages of procurement? As a general rule, a fair and open competitive process discourages bias in procurement, encourages multiple vendors to compete, and enables the organisation to obtain the best value-for-money purchases. As highlighted in the recent Auditor-Generals Office Report, an unfair advantage may

they still serve as visible and useful deterrence. In the $12 million fraud case at the Singapore Land Authority, which involved two senior officers who colluded with several external parties, payment was made to the firms for IT maintenance which was not delivered or performed. The perpetrators kept the procurement amounts within approval limits, and complied with internal guidelines such as putting up the requisite paperwork and getting the requisite approval. Such collusion makes detection of fraud more challenging. As a form of check and balance, another independent party such as the finance team should verify the amount and receipt of goods or services before payment is made. To detect discrepancies in goods received, an ad-hoc stock-take could be conducted, in place of a regular one, so as to introduce a level of unpredictability and to flag out peculiarities in which invoiced goods cannot be located or accounted for. During the payment stage, care must be taken to avoid overpayment due to inadequate checks such as vendors not charging based on contracted prices, duplicate payments and payment based on fictitious invoices. For example, a duplicate payment of

more than $18 million cited in the recent Auditor-Generals Office report indicates the need for controls over payment to be continually monitored and tightened when necessary.

Effective gate-keepers
Data analysis, whether using technology or otherwise, can provide a more targeted approach in reviewing payment patterns, such as duplicate payments. Access rights granted to vendor masterfile database and edit logs should also be periodically reviewed by the appropriate authority. This may help identify phantom vendors and avoid payment of fictitious invoices. Some red flags include photocopied invoices which can be subjected to manipulation, payments without proper supporting documentation such as original purchase order, delivery note and invoice, as well as suspicious vendor addresses. Finance staff often have an unenviable but critical task of ensuring proper supporting documentation before releasing payment. Everyone in the organisation has an important role to play and there is severe repercussion, monetary and non-monetary, should people disregard the controls. In order to be effective gate-keepers, management must also empower finance staff to perform the neces-

sary checks and balances. Further, lean staff strength, particularly in small-medium-enterprises, should not be used as an excuse for lack of segregation of duties. For example, a finance staff in charge of recording the accounts payable balance and preparation and disbursement of manual checks should not be in charge of the creation of new vendors in the system as there is a clear conflict of interest. Several studies suggest that whistleblowers serve as the single most important corporate resource for detecting and preventing fraud. To facilitate this, the protection for whistleblowers is imperative. Hence, companies should establish a whistle-blowing policy, with a formal reporting mechanism, to ensure that the recipient of the whistle-blowing report, which may be the audit committee chairman or head of internal audit department, maintains the confidentiality of the whistleblowers identity at all times. In the event that the identity of the whistleblower is known, for example, a particular employee in the organisation, steps must be taken to ensure that he or she is not subjected to reprisals such as termination of employment. Apart from knowing the impor-

tance of sound system and controls, professionals need to be equipped with guidance and practical knowledge which can be formalised in a Code of Ethics. This helps address ethical concerns and to have the right values in discharging duties relating to risk management and internal controls.

Ethical tone
For companies with overseas presence, having adequate training, easy to understand and easily accessible policies and procedures, as well as Code of Ethics in the local languages for every employee is also important. Apart from setting the right ethical tone within the organisation, clear communication of this tone should also be extended to external business partners. A balance should be struck, however, between designing as robust a control system as possible and the need for the business to operate efficiently and responsively. This will vary with the nature and size of the business and of its industry, among others. The writer is research manager of the Institute of Certified Public Accountants of Singapore

STAT SPEAK

Net Official Development Assistance, 1961-2009

Annual Average in US$: 75 Country Summaries
ODA/ CAPITA $ NO. SOME OF THE COUNTRIES AND [AVERAGE ANNUAL NET ODA/CAPITA $]

1.5 to 1.9 5 to 9.1 11.1 to 15 16.1 to 20.3 21.2 to 23.9 25.1 to 28.4 31 to 50 51.6 to 90.3 Over 100

4 9 10 5 7 10 16 10 4

Mexico [1.5] Thailand [5] Vietnam [11.1] Cambodia [18] Sri Lanka [21.2] Ghana [25.1] Mali [31] Zambia [51.6] Serbia [110.4]

Brazil [1.5] Indonesia [5.3] Bangladesh [11.6] Kenya [19.3] Afghanistan [21.5] Egypt [26.3] Lao PDR [33.2] Bhutan [65.6] Jordan [162]

Venezuela [1.6] Philippines [7.6] Congo DR [13.8] Uganda [20] Costa Rica [23.9] Tanzania [27] Fiji [44.1] Albania [83.2] BosniaHerzegovina 162.6

India [1.9] Pakistan [9.1] Guatemala [15] Morocco [20.3] Guinea [23.9] Tunisia [28.4] Senegal [50] Macedonia [90.3] Cape Verde 221.2

How effective is aid in reducing poverty?

By BHANOJI RAO

ODA poverty relationship among 75 developing nations

80 70 60 50 40 30 20 10 0 0 50 100 150 200 250
AVERAGE ANNUAL ODA PER CAPITA $ POVERTY

N ALL fairness, one must expect a fair amount of poverty reduction arising from, or at least aided by, decades of development assistance generously extended bilaterally and via multilateral institutions to the developing nations. What is the empirical reality? The World Development Indicators database of the World Bank provides information on Net Official Development Assistance (ODA) per capita for each year from 1961 through 2009 for over 216 countries/economies. The database also provides estimates on poverty incidence for a number of years. For the purpose of this exercise, we take the average annual ODA per capita in US$ for as long a period from 1961 as the data permits, and the poverty incidence average for the years 2005-09 for 75 countries, as per data availability on both indicators. (Note: Poverty incidence refers to the percentage of population with income/expenditure below the designated national poverty line.)

The accompanying table provides the summary on ODA. As expected, lots of political and international relations considerations define the amount of aid. Granted, some nations received relatively more aid and some less. Has it been associated with relatively lower levels of poverty? Note that we are looking at the poverty numbers of the most recent years and juxtaposing them against almost five decades of aid. The accompanying graph shows the obvious: aid may not be as effective in reducing poverty as one would like to see. The correlation between the average annual ODA and poverty rate is a minuscule -0.13. That it is negative is a consolation. Formerly with the National University of Singapore and the World Bank, the writer is an honorary professor at the Administrative Staff College of India and governing board member of GITAM University (Visakhapatnam and Hyderabad). Contact bhanoji@gmail.com