Anti-Corruption Audits - ProcurementGuidance for Auditors

ByMuhammad Akram Khan

Former Deputy Auditor General of Pakistanmakram1000@gmail.com

_______________________________________________1. IntroductionProcurement consists of the whole process of acquisition of goods and services from third parties and spans from the concept of acquisition to the end of useful life of the asset or termination of the service contract. It covers a wide spectrum of goods and services from everyday commodities like pen and paper and contracted out services like maintenance of assets to construction of buildings and acquisition of IT equipment. It plays a central role in all government functions from education and health to policing and security services. The governments around the world spend large amounts of money on procurement of goods and services. For example, OECD countries spend 15 percent of their GDP on procurement and in several non-OECD countries this figure is even higher.1In fact, the expenditure on procurement is generally the largest item on the budget after payroll expenditures. Because of the huge business opportunities that public procurement opens up, there is a fierce competition among suppliers to get public contracts. The temptation lures the business firms as well as public employees into corrupt practices. Bribes may involve large sums, reaching up to millions of dollars in large contracts such as arms deals. In terms of percentage, the bribes may range between 5 to 25 percent of the contract value.2

The auditors need to understand the mechanics of corruption in some detail. A simple corruption deal may involve bribery received by a public official (bribee) for awarding a contract to a supplier (briber). However, for concealing this criminal act, sometimes the briber and the bribee acquire the services of an intermediary who facilitates the corrupt transaction, keeping both the briber and the bribee at an arm’s length. The intermediary could be a consultant, architect, engineer, sub-contractor, or a staff member. In large transnational contracts, it could be a legally designated agent of the multi-national consortium of companies bidding for a contract. The bribees may not receive the bribe directly. They may designate natural or legal persons for diverting bribe funds. Bribees can invoke several methods to hide the bribe. For example, the bribe could be a direct cash payment received secretly, a form of consulting fee, a remuneration for false services, overpayment for goods and services, delivery of material for the pursuit of

1 Ehlermann-Cache, N. (2007). Bribery in Public Procurement: Methods, Actors and Countermeasures. Paris: Organization for Economic Cooperation and Development. Pp.5. 2 Ibid. Pp. 49.

private benefit of an agent, payment to a front company owned by a bribee or transfer of funds to a bribee’s hidden bank account3. It is also possible that with the collusion of public officials, some tenderers bribe competitors to keep them away from competition. Banks may also get involved in laundering the corrupt funds. Thus it may become a complex cobweb of transactions, making it difficult to trace and understand the corrupt deals.

The corruption can permeate through various stages in the procurement cycle. It can take the form of bribery for getting registered as a vendor, manipulating specifications, obtaining insider information, reducing quality or quantity of goods supplied, clearance from inspectors and expediting payment. At each stage diverse corrupt practices and methods may be used. The corrupt people can devise innovative techniques for achieving their objectives. With developments in anti-corruption practices, there is concomitant development in corrupt methods and techniques.

Fight against corruption requires a multi-pronged attack. It requires political will, anti-corruption legislation, independent anti-corruption agencies, and wide scale training of government employees in ethics. Part of the fight against corruption can also take the form of well-focused audits by independent auditors. However, we need to understand the framework within which the auditors can play a role in fight against corruption.

Corruption, as compared to fraud, is difficult to detect. In case of fraud, the fraudster manipulates official records in some form and leaves some telltale, which can lead to uncovering of the fraud. In case of corruption, the person who receives bribe, or uses his influence to get an undue benefit for himself, family or friends or abuses his authority for some monetary benefit does not leave any trace in the official records. The auditors, who mainly rely on documented evidence or physical observation, find it difficult to detect corruption. However, they can play an important role in preventing corruption. They can identify opportunities for corruption in the laws, applicable rules, regulations, and procedures by taking an incisive and imaginative look at the procurement cycle. On the basis of their assessment they can make recommendations for improving the systems and procedures. However, the auditors can play this role only if they are completely independent of the procurement process. There could be occasions when they are asked to advise or sit on committees dealing with a procurement assignment. In that case, they should not audit the assignment. Further, the auditors should be independent in deciding the audit methodology. They should have free and unrestricted access to all information and should have freedom to conduct interviews and visit sites.

Objective and scope of the paper

The objective of this paper is to provide general guidelines to auditors for the audit of procurement with a special focus on anti-corruption. Section two of the paper sets the stage by giving a general introduction on procurement cycle. Rest of the paper proceeds through familiar stages of audit: planning, execution and reporting. Section three gives a brief introduction to audit planning. Section four provides comprehensive criteria on audit of procurement. The audit criteria sums up good management practices in procurement with a focus on anti-corruption. Section five deals with assessment of corruption risk in procurement. It consists of two steps: (a) building an inventory of

3 Ibid. Pp. 50.

corruption opportunities; and (b) applying corruption opportunity test, leading to development of the most likely areas of corruption. Section six discusses audit execution. The section provides guidance for writing audit program with anti-corruption focus. The section is intended to sharpen the auditors’ sensibilities about corrupt practices in procurement. Section seven deals with audit reporting and guides the auditors to the type of recommendations they can make for forestalling corruption.

Procurement could be responsibility of one centralized agency in the whole of government or it could be a decentralized function in each department. In the latter case, the departments assign this task to a dedicated section. In this paper we are using the term ‘procurement agency’ in a generic sense and is applicable to a centralized agency in the government or to a section within a public entity.

2. Procurement CycleProcurement planning

Effective procurement starts with the preparation of annual procurement plan. The plan visualizes, broadly, requirement of goods and services and mode of procurement, in particular, if a method other than open tendering has to be followed. The objective is to assess the requirement in sufficient detail before the year starts, reducing the need for exigency procurement. In some organizations, skeletal procurement plans are also prepared for the coming two to three years. Some organizations also prepare a micro-level assignment plan for all significant procurements included in the annual plan. Besides determining the objectives, the assignment plan conceives the manner of approaching the market, enlists all tasks relating to the assignment with responsibilities and target dates and expected outputs. The assignment plan also enumerates specific risks relating to the assignment and assessment of any requirement for external expertise. Before the plan is finalized the procurement agency undertakes market research to have a good understanding of the available products and prevailing prices. The assignment plan can be used as a benchmark to monitor and evaluate the actual performance.

Tendering

Actual procurement process commences with specification of goods and services to be procured. The user sections generally prepare the specifications. The procurement agency guides and requires revision of the specifications by the users so that they are as generic as possible, given the need of the users. Once the need is defined, the procurement agency decides how to approach the market. If the goods and services to be procured are simple, straightforward and standardized, the procurement agency invites open tenders through wide publicity. However, if the procurement is complex and cost of tendering high, there may be a need to build a list of potential suppliers through a multi-stage tender process. In such cases, the procurement agency requests for expression of interest through an open invitation and evaluates suitability of the applicants in terms of pre-defined criteria. The criteria are defined in terms of past experience, financial capability, technical competence, range of products and services being supplied by the firm, etc.

Request for proposals

The procurement agency usually invites requests for proposals (RFP) if the requirement is defined in terms of certain objective to be achieved that may require goods and

services. The RFP enables the prospective bidders propose solutions and methods for the problem at hand for achieving the objective. In doing so, they submit technical solutions as well as price of the solution in financial proposal. Generally, the procurement agency requires the RFPs in two separate sealed envelopes, each containing technical and financial proposal.

Evaluation of bids and award of contract

Evaluation of open tenders for standard goods and services is straightforward. The bidder is selected on the basis of evaluation of financial proposal only. The criteria for financial evaluation need not be the lowest price in each case. It could be the best price in light of life cycle costing. In case of RFP, an evaluation committee evaluates technical proposals as a first step and opens financial proposals only for those who meet threshold of the technical evaluation. The committee records basis of its recommendation that is kept in the procurement file for future reference and for meeting any protests or challenges by unsuccessful bidders. The procurement agency awards the contract on the basis of recommendations of the bid evaluation committee. In large organizations the contract document is a standard template that contains generally applicable conditions besides the specific performance expected from the contractor. The procurement agency also informs the unsuccessful bidders about the award of the contract with an offer to debrief them on their respective bids. Evaluation of bids leads to approval, signing and execution of contract. The procurement agency monitors delivery of goods and services by the contractor. There could be a system of inspection, certification or verification of quality and quantity before invoices are processed.

Vendor evaluation

Well-run large organizations usually have a system of vendor evaluation. The objective is to screen the vendors on the basis of their performance so that sub-standard vendors do not get a future contract. It also guides the procurement staff about vendors who meet high standards and can be relied upon in times of exigency.

Reporting procurement

An essential step in ensuring honesty in procurement is to report all procurements, with details of quality and quantity, rates and sources. The information is posted at the public entity’s website besides issuing an annual report by the procurement agency.

3. Audit Planning Audit objective

The objective of procurement audit would depend on the type of audit. In case of internal audit, it could be compliance with rules, regulations and procedures; for performance audit, it could be assessment of economy, efficiency and effectiveness; in financial audit, it could be truth and fairness of the information. Whatever the type of audit, the auditors can build an additional objective in the audit plan to focus on possibility of corruption in procurement and for making suggestions to prevent corruption.

Familiarization

The audit process will commence with a detailed review of applicable laws, regulations, rules and procedures. It would enable the auditors understand the mandate, mission,

objectives and main operations of the organization and inform them about its structure, staffing, locations, clientele and operational plans. As part of the familiarization process, the auditors would review procurement plan of the organization. The auditors should understand the procurement procedure, responsibilities of various agents, approving authorities, delegation of powers, internal controls at various stages of the cycle, information management, monitoring system, certification of invoices and payment to contractors. The auditors should familiarize themselves with thresholds of open competition, informal quotations, and single tender or limited competition. The procurement agency may have concluded some system contracts. The auditors should review these files to understand these contracts. As part of the audit planning, the auditors should select a sample of procurement assignment plans for having a sound understanding of the procurement activity in the organization. While doing so the auditors will remain alert to the identification of possible opportunities for corruption.

4. Audit Criteria As an essential step in planning, the auditors specify the audit criteria against which they would examine the actual functioning of the auditee. In case of financial auditing, the criteria consist of generally accepted accounting principles, and applicable rules and regulations. For performance auditing, the audit criteria are derived from the generally accepted management principles. In corruption audit, the criteria consist of applicable laws, rules and regulations, as well as generally accepted management practices. While auditing procurement, the auditors would lay down the audit criteria in terms of the expected practices from the procurement agency. These criteria would consist of two types: (a) general (b) specific. The general criteria refer to the principles of good governance that the procurement agency is expected to observe. The specific criteria consist of good practices in procurement with a focus on anti-corruption. In the following discussion we have attempted both types of the criteria. However, these criteria are only illustrative. In actual practice, the auditors would modify these criteria in light of ground reality.

4.1 General Criteria

Conflict of interest

(a) For avoiding conflict of interest, the organization should not accept the bid of any person who is an employee or director of the organization.

(b) The organization should not do business with a company, which has a significant shareholding of an employee or director or son, daughter, father, mother, brother, sister, or in-laws of an employee or director of the organization.

(c) The contractors of the organization should agree that no official of the organization has received or will receive from the contractor any direct or indirect benefit arising from this contract. The contractor should agree that the breach of this provision is a breach of an essential term of the contract.

(d) The procurement staff should not accept any gifts, invitations for meals, or offers of tickets for sporting or cultural events, holiday trips or other substantial hospitality from vendors. They should also not request any transport facility from the vendors. They should not accept any offer of accommodation for overnight stay by the

vendors except where the circumstances are such that there are no other alternative arrangements.

(e) There should be a realistic and meaningful timeframe in which former senior level executives may not solicit employment with government contractors who significantly benefited from policies they formulated while in office.

(f) The invitation to tenders should specifically ask the intending bidders to disclose if they are employing any person who was a past employee of the organization or if they anticipate employing any past employee of the organization. If so, the intending vendors should disclose full particulars of such person(s).

(g) The requisitioners for procurement of any goods or services should not recommend any vendor. It compromises the rule of segregation of responsibilities between the requisitioning and the procurement personnel.

(h) The organization should not allow a consultant, engaged in preparing or reviewing technical specifications or assisting in bid evaluation to recommend a supplier or submit a bid for the requirement.

(i) The persons having an actual, perceived or potential conflict of interest should not be involved in the process of evaluation of bids, selection of bidder or award of contract.

(j) The members of bid evaluation committee should not have authority to approve award of the contract as it compromises the essential principle of segregation of duties.

(k) The procurement staff should declare, on joining the service and thereafter every year, their private business interests (for example, shareholding of a company, or relationship with directors or other key members of a business firm, etc) that may potentially conflict with their professional duties. There should be a system in the organization for verifying these declarations.

(l) In complex procurement assignments spreading over an extended period of time, the dealing staff, consultants, and approving authorities should declare any conflict of interest at the beginning of the assignment. Since the status of conflict of interest may change during the course of procurement, there should be a requirement to update these declarations during the procurement process.

Transparency

(a) The procurement agency should release sufficient information so that an ordinary person can understand the manner the system is supposed to work and the way it is actually working. It should include information on laws, rules, regulations, procedures, institutions and persons involved and forms to be filled. It should provide the information in a timely manner indicating the timing for various actions. It should also announce the type of information it would be willing to provide on request.

(b) For open communication, the procurement agency should organize bidding conference for potential bidders, where rules, regulations and procedures relating to procurement are discussed and an open dialogue takes place between the public

officials and the private sector representatives. Such conferences should be part of the information dissemination campaign of the procurement agency.

(c) The procurement agency should avoid informal communication with potential suppliers. It should establish ‘point of contact’ for enquiries from potential suppliers. There should be no other channel of communication except for handling any complaints or bid protests. The procurement agency should appoint a senior person to approve all correspondence with the potential bidders so that consistency is ensured and favoritism is forestalled.

(d) The procurement agency should ensure that information given to one bidder that could affect significantly the understanding about procurement should be conveyed to all bidders in particular, if it changes the rules, procedures or selection criteria.

(e) The procurement agency should not disclose the identity of the firms who have submitted their bids until after the last date for bidding. This is necessary to minimize chances of collusion among prospective bidders.

(f) The procurement agency should respect any conditions of confidentiality imposed by a bidder on its bid with reference to its copy rights, intellectual property, technical design or pricing basis, etc.

(g) The organization should have a clearly spelt-out line of reporting and a system of management reports that is accurate, reliable and timely regarding the goods and services being procured.

(h) The procurement agency should maintain record of all procurement to show that it followed a due process, and treated all bidders fairly, responded to all enquiries from the unsuccessful bidders and has all evidence for audit purposes.

Open door policy

(a) The organization should have an open door policy, encouraging the employees to reach the senior management uninhibited to share their concerns about any wrongdoings in the organization.

(b) There should be a regular system of meetings and sharing of information with representatives of the staff and listening to their concerns on possible departures from good and ethical practices.

Risk management

(a) Procurement, like other government activities, involves some risk. The procurement agency should carry out assessment of corruption risk for each stage of the procurement cycle.

(b) The procurement agency should ensure that it uses properly trained employees for each type of procurement. If the procurement agency engages an agent or a consultant, it should assign the agent or the consult to a senior person with appropriate delegation of authority.

(c) For minimizing risk of collusion between buyer and seller, the supervisor of the buyer should review and sign off the list of purchases made through e-procurement every month.

Database on procurement

(a) The procurement agency should maintain a centralized database of contractors. The database should provide information also on civil judgments, criminal convictions, settlements and fines and any other cost imposed on contractors. The procurement agency should consult this database before awarding any contract.

(b) The database should have information on past purchases to serve as a reference for future procurements. The database should provide information on various procurement indicators such as average time taken to complete a procurement process, value of procurement, percentage of completed procurement processes, extent of compliance with regulations, etc.

4.2 Specific Criteria

Procurement plan

(a) The procurement plan should be comprehensive and consist of, at least, the following: (i) procurement profile of the organization; (ii) supply risk analysis; (iii) market evaluation; (iv) procurement forecast for the year; and (v) benchmarks of performance and monitoring mechanism.

(b) The procurement plan should be updated periodically during the year, as it tends to get outdated with occurrence of events.

(c) The procurement plan, with probable date of announcement of bid invitation dates, should be publicized so that potential suppliers are able to organize themselves for bidding.

Requisitions

(a) The requisitioner should draw specifications, as far as possible, in a generic manner that does not favor any particular vendor or brand or product. The only exception could be the cases where the organization has explicitly adopted a policy to buy a standardized item and that too should be for a limited period of time. In such cases also, the requisition should mention the word “or equivalent” with the specifications.

(b) Where a requisitioner in the organization makes a request for a proprietary item, the request should come with a written justification duly approved by a competent authority.

(c) The specifications of goods and services should be clear, concise, logical and accurate. The specifications could be function-oriented, performance-oriented, technology-oriented or a combination of all of these. However expressed, the specifications must describe what is mandatory and what is optional.

(d) In case the organization does not have in-house capacity to develop technical specifications, it should, preferably, avail services of the specialist government organizations that develop and maintain technical specifications for various types of goods and services.

Vendor registration

(a) The organization should have a clear system of registering vendors. The conditions for registration should not be unduly restrictive. Generally, they should relate to (i) capital and liabilities; (ii) compliance with tax and labor laws; and (iii) not being blacklisted previously. The criteria for registration could require the firms to submit evidence of internal management systems that promote integrity such as code of conduct for staff and sub-contractors.

(b) If the organization decides to de-register a vendor for unsatisfactory performance, it should inform the vendor with reasons. It should also afford the vendor an opportunity to make a representation or to rectify any deficiency in due course of time with a provision for registering it again if it meets the organization’s criteria. Such re-registration should not take place until a certain period, say six months, expires.

(c) The organization should follow a due process of law for debarring a company from bidding on the basis of past poor performance or unethical and corrupt business practices. The decision to de-register a vendor should be taken by a committee and not by an individual. Any representation made by a vendor on the decision of the organization to de-register it should be reviewed and decided by a committee and not by an individual. De-registration should lead to debarring those firms, which have been convicted for corruption or fraud in the past or have a criminal history4.

Request for expression of interest

(a) As part of its efforts to identify potential suppliers, the organization should request the registered firms for expression of interest. However, the Request for Expression of Interest (REI) should not single out or favor a specific supplier. The REI should be widely advertised, including posting on the organization’s website.

(b) The REI should offer to hold briefing sessions with the potential suppliers for answering questions and providing level playing field to all.

(c) If a site visit is necessary, the organization should offer the opportunity to all potential vendors. Similarly, the procurement agency may require visiting facilities of the potential vendors. In that case, at least two persons should visit the premises of the vendors.

(d) The firms expressing interest should be required to disclose any current suspensions or debarments.

(e) The panel evaluating the potential bidders should record basis of its recommendations.

(f) The procurement agency should inform the firms which could not qualify for short-listing and offer to debrief them.

4 Need not be said that this requires a centralized database on the past performance of firms and on those firms that were convicted in the past. The fact that the procurement agencies usually do not have access to this information makes the application of this criterion limited in scope.

Bidding process

(a) The procurement agency should employ a competitive process for getting best value for money. All qualified registered vendors must be invited to participate in a procurement requirement. Emergency purchases should be done following a prescribed procedure and with the prior approval of a competent authority.

(b) Any information provided to one firm, at own initiative or in response to some query, should be provided to all and at the same time. The organization should not provide any information to a firm that did not get the solicitation documents.

(c) All prospective bidders should be informed about quantity, quality, budgetary limits and specifications to be observed. The invitation to bid should also specify the information required, bid evaluation criteria, conditions for participation, minimum content and format requirements and various deadlines. The tender documents should enclose standard contract template containing mandatory requirements relating to ethical standards, conflict of interest, transparency, and security of information.

(d) The organization should notify any change in the scope of procurement to all registered bidders with a possible extension in the closing date for submission of bids.

(e) In case of cancellation of the bid solicitation, the organization should inform all, and not a selection of, the prospective bidders.

(f) The solicitation documents should clearly state that there would be no contact between the bidders and the procurement staff before the bid closure date except with an authorized person and that too in a transparent manner. However, this does not preclude the possibility of a pre-bid conference or a site visit or survey, the dates and arrangements for which should be announced to all prospective bidders in the solicitation documents. The bidders who express their desire to participate in such events should submit their questions in writing, at least, say, seven days before the event so that written replies are prepared in advance and approved by the competent authority. These answers should be distributed soon after the conference among all participants. During the meeting only written questions submitted earlier should be discussed. There should be no open-ended discussion on written questions. If such questions arise, they should be noted and replied in writing separately later on to all participants of the conference.

(g) Unsolicited bids should be rejected outright.

(h) Any modification to the original bid should be accepted on the written request of the bidder if it is submitted before the closing date of the bids.

(i) Invitation to tender should allow sufficient time for preparation of the bids. Normally, time should not be less than 10-15 days at a minimum.

(j) Once received, the bids should be sealed off.

(k) The deadlines for submission should be categorical. Procedure for any waiver of the deadline, substitution, and withdrawal of bids should be known to all concerned and all waivers should be documented and approved by a competent authority.

(l) The person responsible for receiving the bids should note on the envelope the date and time of receipt and keep all bids under lock until due date and time of opening.

(m) All bidders should get invitation to attend the bid opening session. At least two persons not related with the evaluation should open the bids in presence of those bidders who choose to attend.

(n) The record of bids opened must be kept on a control sheet and every page of the original bid document that contains a price figure must be witnessed and initialled by both openers.

Bid evaluation

(a) The organization should announce the criteria for evaluation of bids to all prospective bidders while calling for bids. It should specify any preference to local or domestic suppliers from the outset to forestall corruption and maneuvering of the competition. Any alterations in the announced bid evaluation criteria should be brought to the notice of all bidders, allowing them sufficient time to re-submit their bids.

(b) The evaluation team can decide to conduct sites visits as part of the evaluation process for assessing capability of the tenderers to deliver the goods and services. However, they should afford this facility to all bidders. The visits to all bidders should be of the same duration. The visiting team should not (i) entertain any change in the price or service level by the bidders; (ii) should not comment on the status of contract at this stage; and (iii) should not seek clarifications or information that may be construed to provide a gain to one bidder over the others. The evaluation team should duly document the information collected and the situation observed during visits.

(c) The evaluation team may decide to interview the bidders or attend presentations by them to seek more information or to clarify any ambiguities. In that case, there should be no private contacts at individual levels. A minimum of two persons should always be present for such encounters. Interviews should not be a basis for revising the bid price or alter service level.

(d) As part of the evaluation process the team may decide to check antecedents of the bidders to ensure that they had not been involved in any unethical dealings in the past. In that case, all information received should be documented but kept confidential.

(e) The bids should be opened and recorded by a committee in the presence of interested bidders and signed by all members of the bid opening committee.

(f) In case of RFPs, price information should not be announced at the time of bid opening as it may involve complex variables and a thorough evaluation before comparison is possible. However, in other cases, the bid opening committee should

read aloud the price information for each item or at least the grand total of the total items to be supplied by each bidder.

(g) A summary of the bidders and their offers (in case other than RFPs), should remain available for inspection by all bidders up to a certain period, say 30 days, of the opening of the bids.

(h) Separate teams should evaluate technical and financial bids. Financial bids should be opened only for those bidders that meet the technical threshold for qualification. Other envelops should be retained un-opened.

(i) All members of the evaluation team should assess the bids independenltly. Subsequently, the team members should hold discussion for reconciling any wide variations in their respective assessments and for agreeing on a final recommendation. The team should record its recommendation on the Tender Evaluation Matrix sheets. They should make comments to support their scoring and also note if any bid is non-compliant with the invitation.

(j) Financial evaluation of bids should be on the basis of life-cycle costs. Further, it should take into account other conditions such as warranty period, settlement discounts, after-sale service, and training of staff, fixed and variable costs, residual value, and any hidden costs, etc.

(k) The Tender Evaluation Matrix sheet should have sufficient details to enable the team members debrief the unsuccessful bidders or help the organization in post-bid negotiations. The technical and financial teams should then meet to agree on a final ranking of the tenders.

Negotiations after original bids

(a) Once the bids have been evaluated, it is generally not advisable to enter into negotiation with the successful bidder. However, if the organization considers that a negotiation exercise would add value to the procurement, more than one person should carry this out and final deal should not indicate that the rejected bidders have been put to a disadvantage. It means it should not create an impression that a similar negotiation would have allowed other bidders improve their offers. The discussion should take into account the general principle of transparency, equal treatment and fairness to all.

(b) The negotiations with the prospective bidders should not, in any case, lead to increase in the quoted price. However, post-bid negotiation should not get a reduction in cost by compromising on quality, service level or critical target dates.

(c) No information received from one vendor should be divulged to others in any case.

Exigency procurement

(a) The procurement agency should follow exigency purchase only if there is evidence that the exigency did not arise by delay in timely planning or by poor management or by delay in budget allocation. The exigency procurement should be within the budgetary limits and the competency of the ordering authority and should be limited to the extent the exigency continues.

(b) All exigency purchases must have a written justification signed by an appropriate competent authority. A proper justification would be such as follows: (a) the operational efficiency of the organization would be affected severely; or (b) the situation would be out of control; or (c) there would be a threat to public health, security or welfare; or (d) an unforeseen situation was likely to lead significant losses or waste.

Limited competition purchases

The procurement agency should resort to it only if:

(a) It is a low value, low volume requirement (predefined limit) from a supplier with a proven track record and niche market.

(b) Tendering is not possible because of an emergency.

(c) Goods and services are available from only one or a few suppliers who have the ability to supply on time and formal bidding is unlikely to reveal more suppliers.

(d) Formal bidding would be uneconomical, unrealistic or inefficient.

(e) Written quotations are invited, although open bidding is not resorted to.

(f) Compatibility with existing equipment is essential and that can be achieved only through procurement from a sole source.

(g) The decision to buy from a sole supplier is approved at a senior level.

Award of contract

(a) There should be no leakage of information about probable acceptance or rejection of a bid until a final decision is taken and announced with the permission of the competent authority.

(b) The information on the award of the contract should be posted on the official website of the organization. It should also be communicated to all who offered their bids, whether successful or unsuccessful. The information should also briefly mention the price finally accepted and the basis for giving the award. However, information on bids not accepted need not be disclosed because transparency beyond a certain limit can create environment conducive for oligopoly in future contracts.

(c) Before signing the contract, the contractor and the organization should sign an “Integrity Pact”, in which both sides agree not to indulge in corruption, and to disclose any commissions, kickbacks or bribes paid or demanded.

(d) The award of contract should be processed expeditiously. The number of clearances required should not exceed three levels in any case.

(e) Performance bond or bank guarantees should be obtained for large contracts.

(f) The organization should weigh the decision to extend or renew the contract in light of contractor performance, contractual obligations, user satisfaction, market developments and financial outlays involved. The extension of the existing contract should be considered if it is economical and effective to do so. The justification should be documented and approved by a competent authority.

(g) The organization should offer to debrief the unsuccessful bidders, which if taken up, can be given over telephone or by face-to-face meetings (depending on the supplier preference). Any debrief given over the telephone should be read out, with the date, time and name of supplier's representative being recorded. If given face-to-face, there should be at least two departmental representatives present. As far as possible, the debrief should be delivered from a prepared "script".

Contract execution and inspection of supplies

(a) As far as possible, responsibilities for procurement and contract administration should lie in different sections of the organization.

(b) The goods or services supplied should be in accordance with the statement of work. Any substitution by the vendor should be approved by the requisitioner, who should also certify that quality of the substitute is same or similar to the one specified at the time of award of contract.

(c) All changes to the contract should be documented and approved by a competent authority. Variations in the contract should follow a formal procedure provided in the contract itself.

(d) The contract management section should monitor the progress in the contract and review it with the vendor. The review should be signed both by the vendor and the contract administration staff responsible for monitoring.

Invoice payment

(a) The contract administration should ensure that the vendor gets all payments promptly according to the schedule.

(b) All payments must be by cross checks and preferably mailed to the vendor.

Independent complaint handling mechanism

(a) The unsuccessful vendors should have recourse to challenge the action of the procurement staff against the announced standard. There should be an independent (outside the procurement agency) mechanism to handle complaints from vendors against the procurement action such as violation of secrecy, unfair competition, evaluation of anomalies, and undue favor to competitors, etc. The mechanism should provide for a due process and formal resolution of all complaints, taking them to the logical conclusion of informing the complainant about outcome of the complaint. The complaint handling mechanism should follow a certain time frame. It should not be an open-ended system.

(b) The complaint handling mechanism should have a set of remedies for the complainant if the complaint is based on facts. The remedies could be in the form of re-bidding if the protest is within the standstill period, suspension of the contract, or compensation to the aggrieved bidder for any damage, etc.

Vendor performance

(a) The contractor should be made aware of the expected service levels, exact specifications, design and durability of the project before they are adopted as benchmarks for vendor performance. The procurement agency should monitor the

performance of the vendors against these benchmarks and keep the vendor informed of any adverse findings.

(b) The organization should award contracts only if the past performance of the vendor had been satisfactory. The vendor performance should be evaluated against such indicators as: (i) fulfillment of delivery schedules; (ii) compliance with terms and conditions of the contract; (iii) quality of goods and services supplied by the vendor and any significant complaint(s); (iv) cooperation of the vendor in redressing the complaint(s); (v) failure to disclose any material information; and (vi) undue delay in performance of the contract; (vi) adherence to Integrity Pacts.

(c) There should be an overall post-implementation review of the contractor and lessons learned should be placed in the vendor’s file for future reference.

5. Assessing Risk of CorruptionAn essential step in audit is to assess the corruption risk in the organization. It would consist of two steps: (a) building an inventory of corruption opportunities; (b) assessing the likelihood of corruption. The following discussion elaborates these two steps.

5.1 Building Inventory of Corruption Opportunities

The auditors will review the basic documents of the organization, interview persons and observe procurement process in practice to assess the corruption risk. The objective would be to judge a theoretical possibility of corruption, given the nature of business and the procurement system in vogue. Some of the rules and procedures may be instrumental in promoting corruption or at least clever persons may manipulate them to their advantage through corrupt means. In some cases, procurement agencies may purposely frame complex procedures, having a cost for the suppliers, and create an incentive for indulging in corruption rather than bearing the cost of compliance with the procedures. It is, therefore, important that the auditors have a close and incisive look at various rules, regulations, procedures and informal practices. They should try to imagine if and how some of these can be misused for undue favors and gains. They should carefully list down all such possibilities and try to compile an inventory of corruption opportunities. The following discussion elaborates some of the possibilities that the auditors may come across in a large procurement agency. However, this is neither exhaustive nor conclusive.

Identification of needs and design of tender

(a) As a matter of good practice, the public entities should avoid procuring different brands of a product to satisfy individual preferences. They should standardize the items of routine use for availing economies of scale. The auditors should remain alert to situations where a public entity procures different brands and models of the same thing. Such practices have a potential for indulging in corrupt practices.

(b) In technically complex procurements, the public entity may not have enough information on goods and services to be procured. They may contact one of the large suppliers to provide information on aspects of technology or functionality of the products. Although the initial contact may be with good intentions, yet it can open door for corruption as the firm may influence final design of the tender

inquiry. In the process, the procurement staff may get involved in bribery from the firm for designing the contract that suits the latter.

Vendor registration and selection

In case of multi-stage tendering where the procurement agency invites expression of interest and then short-lists the suppliers, the opportunity for corruption exists. The agency may not define the qualification criteria clearly or may apply it unfairly, leading to rejection of competitors. The auditors should examine the whole process of short-listing and see if it has been pursued objectively and without bias.

Bidding

(a) The auditors should remain alert to the fact that competitive bidding by itself is no guarantee for honest procurement. In fact, a lot of corruption is generally hidden behind the otherwise competitive procurement through ‘open bidding’. The competing firms try to bribe the public officials to gain market power. Competition itself induces corruption in some cases!

(b) A lax environment in receiving and safeguarding bids can promote corruption. Opportunities for corruption exist if (i) the bids re received and record of the time of receipt is not kept; (ii) the bids are not safeguarded for confidentiality; (iii) bid opening is done by one person; (iv) bidders are not invited to attend the bid opening session; (v) the minutes of the bid opening committee are not recorded and signed meticulously.

(c) Acceptance of late tenders as a matter of course indicates an opportunity for corruption. Generally, late tenders should be rejected and envelops with dated stamps in evidence of late receipt should be kept on file. Non-observance of this practice could have motive of favoring some tenderers over others.

(d) If all tenders except one are non-compliant, and if the procurement involves major financial outlays, the management should recall tenders. However, if it does not do so on the plea that recalling tenders would be uneconomical or would cause unnecessary delays, the auditors should probe the matter deeply. There could be opportunities for corruption in such cases.

(e) Opportunity for corruption exists if a single person does the evaluation of bids, except that it is below a threshold fixed for everyday minor purchases.

(f) Opportunity for corruption exists if the procurement agency enters into negotiation with some selected bidders (not in the order recommended by the evaluation committee), as such a practice does not treat all bidders fairly and equitably.

(g) Generally, the contract approving authority should go by the recommendations of the bid evaluation committee for quantities, quality, and time-scale for procurement. If the contract approving authority exercises its discretion to set aside these recommendations, opportunity exists for corruption.

(h) Frequent unsuccessful and inconclusive open tenders leading to negotiated contracts may also indicate an opportunity for corruption.

(i) A number of unresolved justified bid protests indicate possibility of corruption.

Single tender

(a) There could be a situation where single tender is resorted to on the plea that a vendor has recently completed a contract satisfactorily and re-ordering the same product at the previous prices would be economical than getting into a re-tendering process. The argument is justified in case the re-ordering level is low. As a benchmark, the re-ordering should not be more than 50 per cent of the previous volume or invoice. If the auditors see that single tender has been resorted to for quantities that are in excess of this benchmark, they should suspect some corruption.

(b) The auditors should be alert to a number of similar small contracts concluded on the basis of single tender on the plea that the amount involved was below the threshold for open tenders. There could be a case of splitting a large procurement into several small contracts for avoiding open tendering. Likelihood of corruption in such cases is higher.

(c) Where unusually large volumes of goods and services are obtained through single tender from the same supplier, opportunity for corruption exists.

Public entity as a sole buyer

Where the public entity is a sole buyer and there are several providers of goods and services in the market, the risk of corruption increases as the staff of the public entity can indulge in extortion of bribes due to its monopoly power

Variations in bid description or contract

(a) One of the standard techniques for corruption is to vary the bid description during evaluation process for benefiting a particular supplier. The auditors should closely examine the variation if it has effectively benefited a particular bidder.

(b) Sometimes the procurement agency modifies the original contract to accommodate changing requirements and needs of the users. If the auditors find that such changes are frequent and the revised cost has increased the original cost materially or the scope of original work has increased significantly, they should be alert to the possibility of corruption. The management would usually justify these changes on the basis of exigency, cost of re-tendering or efficiency. However, these excuses could be only attempts to conceal corruption.

Layers of sub-contractors

The main contractor for supplying goods and services may engage a sub-contractor, who engages another sub-contractor, who engages another, and so on. If the auditors find such a situation, the likelihood of corruption increases, as it becomes difficulty to track all transactions to their origin.

Cost-plus contracts

The contract may provide that the contractor would invoice at his cost plus a mark-up. While the intention is to keep the cost to a minimum, the possibility of corruption in this arrangement increases. The main contractor creates shell companies who bill the contractor at inflated rates on which the contractor adds a mark up as per contract. Thus, the organization suffers twice: once by inflated invoices from a shell company owned by

the contractor, and then by way of agreed mark-up. Usually, the procurement staff is aware of such arrangements but remain silent on receipt of bribery from the contractor. It is a case of fraud and corruption together. The auditors should be overly alert on the implementation of such contracts. They should compare the final prices charged to the organization. Also, they should get detailed ownership and managerial staff details of the subsidiary companies that provided the goods and services to the main contractor.

Framework or systems contracts

Framework or systems contract are usually favored if an organization has to procure large quantities over an extended period and at different locations. The user departments or procurement agencies at all locations are informed of the terms and conditions of the contract and are authorized to buy within their respective budgets from the contractor as the need arises. Such contracts are prone to corruption because of the volume of the business that the contractor would get. The vendors would like to bribe the procurement staff. However, they get the support of the staff to insert some compensatory clauses in the contract that covers their cost of bribery. For example, the unit price may be kept flexible to include cost of transportation and timing. The flexibility provides avenues for billing the organizations at higher than due rates. The auditors should carefully scrutinize such contracts and select them for audit in their sample.

Localism in contract

(a) Some organizations award contract to local suppliers in breach of regulations on the plea that the local economy has to be boosted or local suppliers should get a preference over outsiders or local jobs should be protected. Such contracts often have possibilities of corruption.

(b) The international vendors, at times, pay large amounts of fees to local representatives for providing various services. Such fees, usually, have an unwritten share of bribe money to be paid to the procurement staff for getting a contract. Auditors can spot these sums only if these vendors explicitly build these fees in the cost of the goods or services to be supplied by them.

5.2 Assessing Likelihood of Corruption

Once the auditors have built the list of corruption opportunities in procurement, they should proceed to prepare a short-list of these opportunities in the environment of the organization on the basis of likelihood of actual corruption. They can make this assessment by applying Corruption Opportunity Test (COT). Objective of the COT is to determine if actual circumstances prevailing in the organization are conducive to corruption and if so, to what extent. It is possible that the systems and procedures of the organization are not robust, yet the culture of the organization or the overall environment acts as a deterrent and people do not indulge in corruption at a significant scale. It could be vice versa as well. The systems and procedures of the organization may be quite robust, yet the actual practice may provide opportunities for corruption due to environmental reasons, tone at the top, or non-implementation of rules against corruption. Thus Inventory of Corruption Opportunities is a theoretical possibility. By applying COT, the auditors go a step further and assess the likelihood that the opportunities for corruption are actually being availed by corrupt people. If they assess that the

opportunities for corruption exist and the probability of their existence is high, then they should increase the sample size accordingly and plan an extensive examination of organization’s operations. A summary of the result of COT will lead to definition of Most Likely Areas of Corruption in the organization under audit. It would consist of a short list of Inventory of Corruption Opportunities. The short list would be the basis for further fieldwork during audit execution phase.

Developing Corruption Opportunity Test

Each corruption opportunity is based on some indicator of corrupt behavior. The auditors should look for existence of these indicators while applying the COT. The auditors will have to go around and feel for themselves how the business of the organization is being conducted in practice. They will need to interview key persons in the organization for having a fairly accurate understanding of the organizational environment. It is possible that rules and regulations are adequate but in practice they are being violated and bent according to whims and wishes of certain people. While reviewing the list of corruption opportunities, the auditors should carefully pose the following question in each case:

“What is the probability that the applicable laws, rules, regulations, procedures, instructions or practices could be misused or bypassed in this case with corrupt intentions?”

Or

“Are there controls in place that would forestall a corrupt person from indulging in corruption by abuse of authority or misuse of discretion or misinterpretation of rules in this case?”

While reviewing the environment of the organization, the auditors should quantify their judgment on a scale of 0-9, where zero stands for a dry land and 9 for a green pasture for corruption. As a general rule of thumb, an organization scoring an aggregate of 70% or above on COT is a green pasture for corruption and immediate action is required to streamline its systems by changing laws, regulations and management practices, including replacement of key personnel. An organization scoring between 40%-70% requires attention into some of its environment. The auditors should identify the areas where reform is required. When an organization scores less than 40% on the COT, there is time to wait and see. It means the systems and procedures are in place and merely enforcement action is required to prevent corruption5.

6. Audit ExecutionAs a first step in audit execution the auditors should write an audit program tailored to the objectives of the procurement audit with a focus on anti-corruption. They should embed the audit program with two types of issues: (a) general issues and (b) specific issues. The general issues should cover principles of good governance such as transparency, accountability, conflict of interest and principles of good management such as economy, efficiency and effectiveness. The specific issues should cover the procurement cycle as discussed in this paper. For each stage in the cycle, the auditors should keep the audit criteria in view and write procedures for getting an assurance that the management 5 For a practical illustration of Corruption Opportunity Test as applied to procurement audit, see the present writer’s A Practitioner’s Guide to Corruption Auditing (2006).

adhered to the criteria. Writing a model audit program for procurement function will be a long drawn process and does not fall in the scope of this paper. However, the following discussion provides some points relating to specific issues pertaining to procurement with a focus on anti-corruption. The auditors can suitably embed these points in the audit program.

Confirming the understanding

With the inventory of corruption opportunities developed at the planning stage, and short-listed by applying COT in the form of Most Likely Areas of Corruption, the auditors should commence the fieldwork for confirming their understanding of the short-listed opportunities for corruption through larger, systematically drawn unbiased samples. It would routinely require discussions with the relevant staff and interviews with the concerned officials. The auditors should verify if the controls claimed to be in place were in fact operational in the organization and had been so throughout the period under audit. The fieldwork may unravel areas of general consensus and also areas of disagreement. The auditors should carefully analyze these two types of areas and focus, as a matter of priority, on those areas about which there is a general perception of corruption.

Client or public surveys

The nature of corruption audit requires the auditors to break away from their traditional mould and to adopt innovative techniques. The traditional view that the auditors should remain restricted to the internal records and should not venture to collect information from outside does not fit well into the concept of corruption auditing. The auditors should take a proactive approach and collect information from general public, users of government facilities and clients of the audited organization, if necessary. For this purpose they should conduct surveys and collect information from outside the client organization. Generally, a decision to conduct public survey should be considered if the organization is providing any service to the general public, as it is likely to unravel corrupt practices if they were in vogue. Many people would like to raise their voice if they were not satisfied. At this stage, the auditors should develop necessary questionnaires, decide on the sample size, select areas to be covered and method to be adopted.

Employee surveys

Still another option in fieldwork is to conduct a survey of organization’s employees. Such surveys are appropriate if the size of the organization is large and is spread out at different locations. The design of the survey should keep in view that employees have a built-in tendency not to speak out against corrupt colleagues and management. The questionnaire should be couched in a language that provides respondents opportunity for hinting at corruption without naming anyone. The survey of employees could be web-based, providing e-mail links for replies.

Annual procurement plan

Corrupt officials would like not to prepare an annual procurement plan as it allows them to embark on exigency purchases and ‘rush-buying’. These are avenues for corruption and the auditors should question the reason why annual procurement plan was not prepared in time. In some cases, such plans are prepared with considerable delay and in

the intervening period, ad hoc buying continues, providing opportunities for corruption. Thus it is also important to determine when was the procurement plan prepared and if it took longer than usual, what were the causes.

Defining needs

(a) Tender documents based on false calculations and assumptions

One of the corrupt practices is to manipulate the design documents in a manner that some options are ruled out. For example, the procurement officer can exaggerate the cost of river transport or road transport in such a manner that, adding time to river or road transport with the projected cost figure, air transport would appear more economical. The tender documents may assume that the condition of roads in a certain area is so bad that no road transportation of goods is possible at a reasonable cost and within a reasonable time or the river transportation is not possible. Thus the only option left is air transport. The above assumptions may not be factual. The hidden motive could be awarding contract to a favorite air cargo company and to ignore road or river transportation as options. The auditors should verify the basic assumptions in the procurement plan before relying on them.

(b) Falsification of needs

The auditors need to be vigilant about determination of needs at the planning stage. Corrupt officials try to over-estimate the needs for justifying excessive purchases in the hope of getting larger commissions or kickbacks. Alternatively, they would like to understate the need so that it can be easily approved. Subsequently the needs are expanded through change orders or modifications or ex-post-facto approvals. The auditors need to examine the basis on which the need was justified, verifying assumptions and calculations of the requirement.

(c) Procuring new assets instead of repairing the old ones

Repair and maintenance of old assets does not provide as fertile a ground for corruption as procurement of new asset because of the volume of funds involved. The auditors should review files relating to replacement of assets to determine if the option to repair the existing assets was considered on the basis of verifiable documented data. There could be spurious data to justify replacement over repair.

(d) Exaggerated cost estimates

One of the standard techniques of corruption is to exaggerate the cost estimates at the planning stage and complete the work with substantial savings. The executing managers try to claim efficiency and credit for economy. In fact, there had been wastages, which were hidden by the initial exaggerated cost estimates. The executing managers may have received kickbacks from the contractor besides giving him some undue favors and yet creating a surplus from the estimated budget. The auditors are often satisfied if there is cost saving. However, substantial savings over estimated costs could also be a red flag of corruption. The auditors should carefully review the planning assumptions and the basis of cost estimates.

(e) State-of-the-art purchases

The management buys state-of-the-art equipment. It is considered better as compared to purchasing outdated technology. However, this has a catch. If the new equipment is not compatible with the existing one, it may be difficult to use it. Or, the staff may not know how to use the new equipment and there is no arrangement for training. Ultimately, more money is spent in modifying the existing equipment to make it compatible with the new purchase or the new equipment remains unused for want of expertise6.

(f) Unrealistic or fake feasibility studies

A method of indulging in corruption is to arrange fake or unrealistic feasibility studies through consultants or in-house staff. The studies are either unusable or remain unused. The conclusions in the studies are either vague or impractical. However, they are carried out to fulfill the requirement for feasibility studies and then overruled or set aside for going ahead with a pre-designed agenda. The auditors should go deep into the whole exercise of feasibility studies and see how far they were genuine exercises and how were they utilized.

Bidding

(a) Unusually short time for bidding

Unusually short time for bidding presents an opportunity for corruption. The procurement staff can oblige their favorite bidder (of course, by receiving bribe), who is already in picture informally, denying sufficient time to other potential bidders for submitting their bids. While reviewing tender documents, the auditors should look into the time allowed for submission of tenders.

(b) Extension in bidding deadline

If the auditors find that one or a few selected bidders have been granted extensions in time to submit the bids, the likelihood of corruption exists. The management can argue in such cases that others did not ask for it. Such explanations are usually lame excuses.

(c) Electronic submission of bids

In case bids are to be submitted electronically, there should be robust controls on confidentiality of bids so that information submitted by one bidder is not accessed by an unauthorized person, including those dealing with the procurement assignment. The auditors should particularly test these controls for effectiveness. Examples of such controls are determination of levels of access rights, segregation of hard drives, allocation of secure passwords, and submission of files in Portable Document Format (PDF format) that does not allow any alteration.

6 The author is aware of a real-life example. A government hospital imported a state-of-the-art dental unit, which could not be installed for five years, as the hospital could not identify anyone who could install it. Ultimately, the hospital contacted the manufacturers, who refused to help as by then they had discontinued that model. The person who ordered this unit had colluded with a local vendor for importing this expensive equipment in the name of state-of-the-art machinery. He could have got his commission.

(d) Fake or limited publicity

The records of the organization might say that the advertisement for the tenders appeared in a certain number of newspapers and magazines. In fact, either the figure may be fake or the advertisement may have excluded a certain region altogether or may have appeared in a manner that could easily go unnoticed. Other corrupt practices could be avoiding publicity altogether on grounds of state secrecy, defense needs, exclusivity of research, additional requirement under a previous contract, or experimental purchases. All such situations require auditors’ attention, as they may have hidden corrupt motives.

(e) Attendance on bid opening day

The auditors might notice that the attendance of bidders on the bid-opening day was very thin or that only one bidder who attended was the one who got the contract. It could be that the invitation for attending the bid opening session was suppressed en route through collusion with the postal or courier service or the invitations were issued so late that they did not reach all invitees on time.

(f) Bid rigging

Bid rigging takes place where the prospective bidders join hands and submit bids in a manner that one of them gets the award at a higher than market price by quoting the least price, while others conspire to quote higher prices. In the next round, another one of the group gets the award by following the same procedure. In this way, the cartel benefits each other but the organization loses money through higher than market prices. Bid rigging per se does not involve corruption. However, it can involve corruption if the procurement officers also join hands, once they are able to detect the practice and agree not to interrupt the practice.

Bid rigging is a complex phenomenon. The procurement officials can detect it if they so do not join hands. There are several methods. For example, the procurement officials get market prices through an informal inquiry and if the difference is significant, there is a possibility of bid rigging. They can check with some sister organization that may have procured the same products recently. They may analyze the pattern of bids in successive rounds and to see if the known bidders are taking turns in different awards. If the procurement officer, despite suspicion of bid rigging does not take any action, there could be corruption on their part. If the auditors suspect bid rigging, they should examine if the procurement agency took reasonable steps to forestall it.

(g) Correspondence with bidders

The audit procedures should include file review of correspondence with bidders. The focus should be on any information that may have been provided to one or a few bidders to the exclusion of others.

Bid evaluation

(a) Technical evaluation criteria may favor a particular bidder

The procurement agency may develop technical criteria to favor a specific bidder. For example, past work with the organization may carry a weight of 30-40 per cent, debarring

those who did not have previous experience with the organization. The technical criteria can have such subjective factors as “environmental considerations” or “architectural design” with the intention of helping a particular bidder. The auditors should examine the weighting system and discuss it with the management to ensure that it was reasonable.

(b) Local conditions in evaluation criteria

Another loophole can be introduced in the name of specific economic conditions requiring preference for local bidders, or for protecting local environments, or for developing under-privileged areas, etc. The auditors should examine how these considerations were built into the technical criteria and that they should have been disclosed in advance to all concerned.

(c) Corruption while remaining within the rules

Another type of corruption is where the public officials behave within the framework of the rules. They break or bend no rule and a routine audit examination may not suspect any corruption. However, there could be hidden corruption. The procurement rules are framed for erecting barriers to entry, facilitating qualification of a particular company. For example, the requirements of capital or the level of liabilities, or the nature of technical experience required are defined in such a manner that some of the potential competitors are unable to enter the bidding process. The auditors need to review the bidding rules from this angle.

Spurious lowest bid

A method of collusion between the public officials and bidders is to award contract to the lowest bidder on the basis of overall cost. But unit costs of some items in the bid are higher than others who did not get the contract. Subsequently, the items with the higher unit cost are ordered over and over again, increasing the total quantity of such components several times the initial procurement. Normally, fresh tenders are not called if the cost is the same as agreed in the existing contract. The contractor earns hefty profits. The public officials get their cut. Only the organization loses in the form of higher prices. Thus the auditors should not be satisfied with the lowest bid but also analyze the unit cost of items. In particular, this is important if the repeat orders involve those very components where the unit costs were higher than those of the competitors. Besides, they should determine why the total quantity to be procured was not disclosed or planned in the first instance.

Uneconomical life cycle cost

The purchase price of the equipment is lower but the maintenance, to be carried out by the vendor, is quite expensive and makes the whole deal uneconomical when compared to other competitors. Therefore, the auditors should always look for life cycle costing and see how the management has handled the question of maintenance. Ideally, the purchase contract should have a provision for maintenance as well so that the bids contain these two elements and it becomes possible to compare the life cycle costs quoted by different bidders.

(d) Obvious high prices for common goods and services

The auditors may notice that some common goods, like stationery, cleaning material, ink cartridges, crockery, water, etc, were procured at obviously high prices, despite all formalities for open bidding. Auditors may like to check prices of such goods on Internet or even from the open market. Such situations also raise concerns about corruption. Similarly, prices may be obviously disproportionate with reference to inputs and outputs for various services. The auditors should examine such cases in depth.

Contract award

(a) Large sole-source procurement

The organization is making procurement from a single source for over a long period, though it appears to have fulfilled all formalities of competitive bidding. The usual excuse is that tenders were invited but no one except the sole bidder showed interest or in each case the same bidder was the lowest. Such situations have a catch. Either the requirement was defined in such a manner that only one bidder could comply, or advertisement was not wide enough or there was an implicit collusion among bidders or the quantities required were too low or too large for one bidder, etc. The auditors should demand information on the efforts made in market research or for promoting competition. The procurement agency should have documentation to support the contention that the sole source procurement was the only option.

(b) Totally unknown and new supplier

The auditors may notice that an unknown new supplier appears on the scene. It could be a shell company, created by one of the staff members or their related parties to get business. Such companies do not have business operations of their own. They provide goods and services by procuring from other sources. Prices of some components are higher than the market but are manipulated in a manner that immediate total order price may be the lowest. Once enlisted as vendor, future re-orders of those components, in which these companies had quoted higher rates would be placed as a matter of course. The auditors should be alert to such totally unknown companies that appear on the scene. If the evaluation committee recommends a new bidder and it has also not checked the antecedents, the auditors should be alert to such selection. This is all the more imminent if the procurement was done on the basis of single tender.

(c) Significantly high or low prices

The auditors should be alert to the possibility of corruption if the contract price is significantly higher or lower than the budgeted price (about 20 percent or more). The variation could be due to collusion of vendors in raising prices or poor quality or defalcation in quantity. It could also be a mechanism to get the contract at low prices and then increase the quantities or issue change orders at varying prices later on, thus compensating the contractor for the bribes he paid.

(d) Delay in signing the contract

Abnormal delay in signing the contract after announcing the winning bidder indicates likelihood of corruption. The contract awarding authority may, secretly, be negotiating bribe with the winning bidder. The auditors should analyze the time taken in signing contracts for a sample of contracts.

(e) Very short standstill period

‘Standstill period’ refers to the time between notification of decision to award a contract and the date when the actual contract is signed. The standstill period allows the unsuccessful bidders protest the decision of the award. An exceptionally short period or absence of any such period limits the opportunity for the competitors to protest such a decision and could involve corruption. Generally, a period of 10-15 days is considered appropriate, depending upon the nature of procurement.

(f) Corruption by breaking, bending or ignoring the rules

A type of corruption takes place when a public official breaks, bends or ignores a rule. For example, the rules of procurement may require that there would be no negotiation with only one bidder. But the procurement officer engages in that. Or, the rules may specify that the information of one bidder would not be passed on to another but there is evidence that the procurement officer violated this rule. Such types of misbehavior are usually induced by corruption.

(g) Split contracts

A common corrupt practice is to split large contracts into small ones, avoiding higher authorization on one hand and open bidding on the other. The favorite contractors get small contracts and share the booty with the management. If the auditors see such contracts, they should suspect corruption.

(h) Omission or dilution of certain clauses in the contract

Sometimes the contract omits such administrative clauses as relating to liquidated damages or performance bonds or penalties for reduced quality or for missing the deadlines. Such omissions are not innocent oversights. There may be collusion between the contractor and the public officials. Alternatively, these clauses may be framed in a manner that reduces the effect of penalties. When these clauses exist appropriately, the project mangers may not initiate any action against the contractor. This should not be mere laziness or inefficiency; it is usually due to corruption.

(i) Unresolved bid protests

During file review, the auditors may notice unresolved bid protests. A deeper review may indicate that the protesters raised these disputes justifiably but the management ignored them. The auditors, with the agreement of the management, may decide to interview the protesting bidders to make a first hand assessment. Such cases indicate a situation of corruption and may require investigation.

(j) Changes in standard contract template

The audit procedure should include review of contract in light of standard contract template and focus on any significant changes in the standard terms and conditions. They could give a clue to corruption in the award of contract.

(k) Changes as a result of negotiation

The auditors should review results of negotiations with the winning vendor after the tenders have been evaluated. Normally, the negotiations should not change the basic character of the tender in terms of quality, quantity or other significant conditions such as after-sale service or staff training or warranty period, etc. Any significant change as a result of negotiation, usually, calls for fresh tendering otherwise it should be construed as restricting competition through backdoor.

Contract administration

(a) Discounts and promotional products by the contractor

The auditors should interview the contractors to find out their system of discounts to customers and then verify if the organization was availing them. Further probe may establish that some employees of the organization are sharing it with the contractors’ staff. Similarly, the contractors may be distributing promotional gifts among the procurement staff. These gifts may be of substantial value, like holiday trips abroad, dinners and music nights, expensive gifts on wedding ceremonies of the procurement staff, etc. These are indicators of corruption.

(b) Frequent extensions in contract

Opportunities for corruption exist if procurement staff shows an undue and unjustified favorable treatment to one supplier over a period of time. An example could be frequent extensions in time to a particular contractor.

(c) Poor quality sub-contracting

Where a contract provides for sub-contracting, it is important to ensure that the performance of the sub-contractor comes up to the standard visualized in the main contract. The main contract should provide for this assurance by the contractor. Where a contractor engages a sub-contractor without a proper provision in the main contract, it is an outright violation of the contract. If the main contract does not guarantee performance of the sub-contractor or the contract management does not object to employment of a sub-contractor, it is a clear case of collusion and possible corruption and should be investigated.

Procurement management

(a) Rotation of procurement staff

Opportunity for corruption exists if the auditors find that procurement staffs at certain desks have been there for a long period. They are likely to develop friendships with the vendors over time. The auditors should be alert to such situation.

(b) Response to complaints of corruption

The auditors should review the status of complaints against corruption and the action taken by the management. Failure to take an action or a lukewarm attitude towards complaints should alert the auditors about risk of corruption. Anonymous complaints are,

normally, not taken seriously. However, there should be some evidence that some elementary investigation was done to ensure that the anonymous complaint was baseless.

(c) Past audit recommendation

Disregard of previous audit recommendations encourages corruption. If the organization has no systematic follow-up of past audit recommendations, it gives a wrong message to the corrupt officials: they can get away with anything. The situation requires auditors’ attention. They should aggressively follow up with the past audit recommendations.

(d) Potential conflict of interest

The auditors should get a list of key contractor personnel with their background and experience. If the contractor is employing former government servants, who were responsible for procurement and contract administration of similar contracts, there could be a potential conflict of interest. The auditors would need to go deeper into the dealings of these officials with the contract administration for possible compromises in quality, quantity and delivery schedules through collusion with the present staff. Also, there could be evidence that these very officials handled the present contract and provided some undue benefit to the contractor.

7. Reporting Results of AuditGenerally accepted auditing standards require that the auditors report results of their work in the form of an audit report. While the audit report on procurement would consist of the findings and recommendations relating to the particular entity under audit, the focus on anti-corruption would suggest that the auditors also make recommendations for preventing corruption. They should focus on the systems and procedures that may be conducive to corruption or leave some lacunae for manipulation by corrupt people. The main guidance for developing recommendations is that the auditors should analyze deviations from the audit criteria and aim to persuade the management to get closer to it, since that would be in line with the generally accepted management practice. The auditors should discuss the draft report with the management and seek their agreement in principle. The objective is to couch the recommendations in a manner that is acceptable to the management. In the following discussion, we shall give a sample of recommendations that the auditors can make while pursuing the objective of anti-corruption in procurement. These recommendations are only illustrative and the auditors would need to modify them according to the actual situation.

Transparency

(a) While planning procurement, the organization may have to contact some potential suppliers. The organization should clearly define the parameters within which such contacts can take place. It should also have the procedure of recording details of the information shared in these contacts. Such procedures enhance probity and transparency in procurement.

(b) The organization should have a standard procedure that requires documentation of important decisions relating to procurement, in particular if there is a departure from the generally accepted good practice.

(c) The public entity should distribute publicly information relating to procurement such as invitations to tender, contracts awarded, terms and conditions of contracts, future dates of tender invitations, etc. The most appropriate medium for transmission of information is to place the information on the entity’s web site.

(d) As far as possible, a committee, rather than a single person, should make all key decisions such as award of contracts, follow-on orders, extension of contracts, variations in existing work orders, changes in prices, etc.

(e) The procurement agency should post on its website a written justification of any contract award, if it has not been given to the lowest bidder. This information should also be available to all bidders on demand.

(f) The procurement agency should install a system of e-mail alert for new procurement opportunities and should offer to register the potential vendors for such e-mail alerts.

Governance

(a) The head of the procurement agency should be a senior person in status and known for integrity and honesty. The staff at the lower level should also be selected with strict regard for qualification, experience and spotless antecedents.

(b) The terms and conditions of service should debar the head of procurement agency from seeking employment for a period of two-three years with any of the vendors of the organization.

(c) The procurement staff should be rotated frequently to reduce the level of familiarity with the bidders in a specific line.

(d) There should be more stringent ethical standards for persons involved in procurement, such as requirement for disclosure of assets even at lower levels or more strict criteria for screening at time of recruitment, or training in ethics for longer periods, etc.

Discretion of procurement staff

Discretion is a necessary evil in public administration. However, the procurement staff can misuse it for receiving bribes and undue benefits. The auditors should carefully analyze laws, rules and procedures for identifying areas of discretion and pointing out where it can be substituted with objective criteria. Where discretion cannot be dispensed with the auditors can make following recommendations for minimizing its misuse.

(a) The public entity should issue guidelines publicly for using discretion so that the clients know the framework within which public officials can use discretion.

(b) The system of inspection and approval of goods and services should have more than one level.

(c) For payment of large amounts a committee, having at least one or more specialists, should approve the supplies or the work.

(d) There should be an institutionalized system of post-facto administrative reviews of the decisions made by public officials.

Protection of whistleblowers

(a) The government should enact necessary law for effective protection of whistleblowers, witnesses and experts who give testimony against corrupt practices for encouraging honest reporting of misconduct as well as discourage retaliation or interference in this reporting. The law should also be a deterrent against false and cooked-up reporting. The auditors should make recommendation for enacting the law if it does not exist.

(b) The organizations should establish hotlines and e-mail access for anyone who would like to inform about corrupt behavior of an employee or a third party dealing with the government.

Monitoring and oversight

(a) There should be an effective system of internal review and appeal to ensure legal recourse and remedies if the procurement staff does not follow rules or procedures.

(b) The auditors should recommend enacting a law that permits it to rescind a contract or withdraw a concession if there is evidence of corruption.

(c) The procurement agency should conduct training and awareness workshops for potential bidders, informing them about the rules, procedures and mechanism to lodge a complaint if there is a failure. It will initiate a cultural change.

Use of information technology: e-procurement

(a) The auditors should encourage e-procurement. E-Procurement is defined as automation of the procurement process by using technology. Besides other advantages such as speed and simplicity of ordering, visibility of supplier stock levels, accuracy of delivery times, reduction in order error rates, and elimination of bureaucracy, it is more transparent than the conventional procurement process7. It reduces opportunities for corruption as it curtails the personal contract of public employees with the suppliers. It is more relevant in case of systems contract where individual user departments can place online orders with the approved vendors at agreed prices without dealing with the contactor. However, e-procurement can be effective only if it comes along with efforts for capacity building through training of employees and issuance of guidelines and manuals.

(b) As a long term good management practice, the procurement agency should set up an e-procurement portal that provides information on all planned procurements. The portal should be accessible to potential vendors for uploading their catalogues. It could also be enhanced for reverse auction. The recommendation would require signficant investment in technology. The auditors should discuss its practicability with the senior management.

7 For case studies how e-procurement has increased transparency in Korea, Mexico, and Brazil, see Ehlermann-Cache, N. (Ed.) (2005). Fighting Corruption and Promoting Integrity in Procurement. Paris: Organization for Economic Cooperation and Development. Pp.14.

Information on procurement

(a) The procurement agency should maintain information on all procurements such as requisition requests, options analysis, mode of procurement, technical and financial evaluation, approval of contract, delivery by contractors, inspection of goods and services, and vendor evaluation. As far as possible, all this should be at one place.

(b) The procurement agency should collect information on procurement done during a period for comparison with budget and analysis of trends in various goods and services. It can help identify any abnormal purchases and need for better planning and budgeting, besides any possibility of corruption and fraud.

(c) The procurement agency should have information about who purchased what to ensure that the procurement staff has the necessary skills and training in their respective fields.

(d) When a public entity operates at different locations, there is a risk that the employees of the same entity at different locations enter into different arrangements for same or similar goods and services. For mitigating the risk, the public entity should collect and disseminate information on prices paid for various goods and services at different locations. The information can provide basis for benchmarking prices. Where possible, information on prices and other terms and conditions for procurement done in the private sector should also be collected for purpose of comparison.

(e) The procurement agency should compile information on performance of various suppliers and contractors.

(f) There should be information on various methods of procurement, enabling compilation of information on procurements with limited competition.

Continuous auditing

There is a recent development in audit methodology that emphasizes continuous auditing as the transactions are taking place8. Traditionally, audit has been a post-facto exercise based on a sample of transactions. Despite all refinements in the audit methodology, the risk of not detecting an error or fraud remains. Technology has enabled the auditors to check 100 percent transactions as the events are happening by getting access to the files of the executive on real-time basis. The basic documents such as work orders, inspection reports, supplier’s invoices and various approvals are scanned into the computer of the executive. The auditors get an on-line, real-time, read-only access to these documents. They can audit the transactions through various stages and can point out any error or omission while it is happening and before it gets too late. The auditors can recommend that the management install a system of continuous auditing. Besides other advantages, it can act as a deterrent to corruption.

Procurement manuals

(a) The public entity should develop standard operating procedures (SOPs) for various stages of the procurement process. The SOPs should be part of the procurement

8 Coderre, D. (2005). Global Technology Audit Guide-3. Continuous Auditing: Implications for Assurance, Monitoring and Risk Assessment. Florida: The Institute of Internal Auditors. 44pp.

manual. The manuals should determine conditions for exigency purchases, sole source purchases and cash purchases. There should be unambiguous limits of authority to be used at each level.

(b) The commonly used items, such as computer accessories, and stationery should be standardized for availing economies of scale and reducing possibility of maneuvering specifications with collusion of procurement staff and vendors.

Human resource management of procurement staff

(a) Procurement agencies should develop a corps of professionals for the procurement function. The procurement is a specialized technical function with needs for training in techniques and code of conduct. The staff should have incentives for adhering to the code. The procurement agencies should offer training to the purchasing staff in rules, regulations and ethical standards. The staff should be aware of risks, techniques and methods deployed by corrupt people and the mechanics to prevent corruption. The staff should also be sensitized about detrimental effects of corruption9. The procurement staff should be trained in technical specifications of various types of equipment and services enabling them to remain free from the vendor capture.

(b) The organization should strictly enforce the system of checking antecedents of potential employees before they are hired for procurement-related jobs. The screening should aim at getting reports from referees, previous employers and other relevant sources on any past misconduct or history of fraud and corruption of the potential employees.

(c) The procurement agency should undertake independent internal targeted quality assurance reviews of its procurement activity for particular lines of procurement and for large contracts.

(d) The public entity should introduce a system of performance measurement of the procurement staff in light of laws, rules and the contracts executed. The performance indicators should be defined in consultation with the staff and should be used as benchmarks for their career progression.

(e) The procurement agency should undertake client satisfaction surveys at least once a year. The results of surveys should be fed back into the future procurement plans and practices.

(f) While processing, finalizing or authorizing a contract, the procurement officers should individually sign a declaration that they did not have any conflict of interest.

9 Ehlermann-Cache, N. (2007). Bribery in Public Procurement: Methods, Actors and Countermeasures. Paris: Organization for Economic Cooperation and Development. Pp. 58.

Re-engineering of complicated procedures

The auditors should identify critical service delivery areas and develop a complete flow of the procedures and steps. They should then determine the optimum time required to deliver the service if the procedure is followed honestly. They should compare it with the “expectations” of the citizens, determined through surveys and see if the optimum time is a fair basis for delivery of the service. As a second step, they should discuss with the management the possibility of eliminating some of the steps and assess the risks involved if such a proposal is implemented. If the auditors are confident that such re-engineering of procedures would not involve a significant risk, they should consider making such a recommendation in their report.

Building local content in contracts

Sometimes the procurement agency requires that the contract-winning firm undertake some projects of public welfare as part of the social responsibility, such as building a school, a road, a water supply scheme or a gas supply line, etc. If the contract-awarding agency considers such requirement as essential, it should announce it at the time of inviting tenders so that all competing firms can build its cost in their quotation. Dealing with anyone firm on these lines in a secret manner and then favoring it in the final contract-award on this basis would be a corrupt practice, though the procurement agency officials may not be direct beneficiaries of this deal.

Being part of anti-corruption network

The organization should become part of the anti-corruption network both nationally as well as internationally for receiving and sharing information about vendors and employees involved in corruption. The network could also be a good forum to exchange information, manuals, guidelines and best practices on procurement.

Cost audit of sole supplier

If for reasons of technical specifications, reliance has to be placed on sole source, the procurement agency should conduct market surveys for quality and prices and insist on cost audit of the sole supplier before any follow-on order is placed.

Black or white lists

The procurement agency should have a mechanism in place for blacklisting corrupt firms. Alternatively, a ‘white list’ of firms eligible for bidding, based on past performance and honest dealing is developed on the basis of a transparent criterion.

Price protection clause

The procurement agreement should have a price protection clause that guarantees that the price and discounts offered by the vendor would be equal to or more favorable than those offered to any other customer, with a provision for the organization to audit the records of the vendors for compliance with this guarantee10.

10 Such clauses can be inserted only where the organization is to make large procurements over an extended period. The vendors may not agree to open their books to the organization’s auditors in case of small buys.

Cost-plus contracts

(a) In case of cost-plus contracts, the contractor should disclose the profile of key personnel in his or her organization to forestall any potential conflict of interest.

(b) In case of cost-plus contracts, the main contractor should disclose the nature of relationship with subcontractors to prove that there are no organizational inter-linkages for bidding up costs.

8. Concluding RemarksProcurement in public entities could consist of simple straightforward purchase of standardized products at competitive prices from open market. It could also be complex contracts for delivery of goods and services over an extended period of time and at diverse locations. The complex procurement assignments require proper planning. The more complex a procurement assignment the greater is the risk of corruption. Audit of procurement with an anti-corruption focus presents the auditors with formidable challenge, as they would be expected to report on corruption, which has a little documented evidence. For this reason, the auditors should be quite clear about the fact that they can play a significant role in prevention of corruption and have only a limited role in detection of corruption, although they can provide important information to anti-corruption agencies for investigation and detection of corruption.

The auditors would need to tailor their approach and methodology according to the procurement assignments included in their sample. The paper has attempted to give generalized guidance to auditors for auditing procurement with an anti-corruption focus. The paper takes the auditors along, step-by-step, through the familiar route of planning-executing-reporting of audit. While doing so, the paper synthesizes comprehensive audit criteria for procurement audit with anti-corruption focus. As part of the risk assessment, the auditors should identify corruption opportunity through a set of corruption indicators in procurement proposed in the paper. The risk assessment takes a further step by applying Corruption Opportunity Test for determining areas of most likely corruption. The paper suggests a set of over forty areas for review during audit execution. The paper proposes a number of recommendations that the auditors can include in the audit report for preventing corruption. Need not be said that the generalized approach suggested in the paper cannot cover all situations in practice. The auditors would need to exercise their judgment to tailor the methodology in this paper to the actual situation at hand.

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