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Indicators of Corruption in Procurement and Contract Cycle

04-Oct-2021

By: Ala’ AbdelAziz AbuNaba’a - Kuwait

Expert in Internal Auditing, Control, and Governance

Corruption in procurement and contract cycles is definitely one of the worst risks that might attack any organization of any kind. Again and again, these corruption cases attract a monumental share of media attention. Therefore, fighting corruption and managing the resulting risks need the senior managements’ awareness and keenness to ensure the effectiveness and professionalism of those responsible for procurement and contracting and their ability to fulfill the various needs while maintaining the quality standards and delivery on time.

The Association of Certified Fraud Examiners (ACFE) formally defines corruption as “any wrongful action undertaken to acquire benefit”. The corrupt individual in that form of fraud could be an owner, a manager, or an employee in the organization (in this case; the corruption is a form of an occupational fraud), or could be from outside the organization. The common forms of corruption include: bribery, conflict of interest, illegal gratuities, economic extortion, kickbacks, and bid-rigging.  

Last April, the ACFE published its 9^th, a report that is published every two years about occupational fraud. The report includes the largest number of cases that have been studied, as it addressed 2410 cases of occupational fraud in 114 countries around the world. The most prominent results of the report include the following:

1. Corruption is most common in the MENA region.

2. Individuals who work in procurement and contract cycles are more prone to corruption (68.9% of the detected cases).

3. There are many outstanding yet undetected corruption cases, however, in the detected cases, on average, it was found that the corruption started 18 months ago. The reason behind the long period (since the inception of the corruption till its detection) is that corrupt individuals exert enormous efforts to disguise the corrupted operations. According to the abovementioned study, manipulation of the relevant documents was one of the most prominent methods used in disguising corruption.  

4. The higher the occupational level of the corrupt individual, the higher the losses incurred by the organization, this is simply because senior employees are more able to overcome regulations and powers. 

5. The average loss, when the corrupt is one of the executives or owners, is $703,000, representing 18.6% of the detected cases, while the average loss is $173,000 when the corrupt is one of the managers, representing 36.8% of the detected cases, and when the corrupt is an employee in the organization, the average loss is $65,000 representing 40.9% of the detected cases.  

In fraud science, the indicators that may signify the presence of corruption are called “Red Flags”. Generally, “Red Flags” is an expression that is used to indicate many explicit and implicit warning signs, and in fraud science, this expression is used to denote matters or actions that have been associated with fraudulent behaviors through time, and need to be handled with consideration, cautious, and investigation. The existence of such indicators doesn’t necessarily mean the fraud has actually been committed, however, if they appear, those who are responsible in an organization should pay attention. The indicators should be investigated in a canny and smart manner because they might be the first sign that will eventually lead to the detection of what’s been hidden for a long time, accordingly, an immediate investigation should be conducted about the employee to whom the indicators point after the responsible individual collects sufficient factual evidence that suggests the existence of corruption.

In his book, Financial Fraud, Dr. Adnan Abdeen wrote, “Alertness to the signs and indicators of occupational fraud helps a lot in investigating fraud and providing evidence after it is detected, the organization should educate its employees, clients, suppliers, and everyone it deals with about all or some of these signs. Moreover, most of these signs do not need expertise or practice, or experience in accounting or in the principles of management, all it takes is alertness, observation, awareness of the surroundings, and recognition of the consequences and outcomes of fraud on the organization and the economy of the country as a whole”.

Referring again to the study of the ACFE, the most prominent issues or actions associated with corruption cases, in which those involved in the procurement and contract cycle were engaged, are as follows:

1. Noticeable inconsistency in the standard of living and the level of income - 47.6% of the detected cases.

2. The behaviors at the workplace involved malice or frivolousness (wheeler-dealer attitude) - 28% of the detected cases. 

3. Financial problems - 22% of the detected cases.

4. Centralization of work and avoidance of delegation despite the urgent need - 21% of the detected cases.

5. Peculiar relations with one of the suppliers - 21% of the detected cases.

It is worth noting that in most cases, individuals who committed fraud were stuck with more than one indicator or sign. Other indicators that signify the existence of corruption in the procurement and contract cycle in any governmental, private organization, or NGO include the following:

1. Needless procurements and service contracts, or more than needed, and unjustifiable increase in inventory or decrease in inventory turnover.

2. Dealing with the same supplier for a long time without continuously studying other opportunities available in the market (unjustifiable monopoly). 

3. Inconsistencies between the needs and the procurements’ budget and service contracts.

4. Inadequate technical descriptions of the various needs of the organization, for example, failure in conducting the necessary studies before bidding, inaccuracy in setting specifications, designs, and drawings, or failure in drafting certain technical specifications; to direct the award to a specific organization. In other cases, a certain applicant always gets awarded in bids/tenders, the few offers submitted by suppliers, or when some suppliers fail to respond to the request to apply for a tender/bid.

5. The mechanism of making the procurements or contracting decisions does not include assessment of the alternative opportunities, the supply alternatives, for example, include manufacturing, purchasing, leases, lease to own, comparing the suppliers and brand names...etc., or, the procurement alternatives: bids, tenders, or direct assignment,...etc., or sometimes the lack of clear principles to assess the offers and alternatives.

6. The lack of approved regulations or bases to add or delete the suppliers approved by the organization, or if there are some requirements that are intentionally set to exclude a category of suppliers, as exaggerating in the required bid bond.  

7. The terms of contracts do not fulfill the needs of the organization in an appropriate and a clear manner, or, the lack of legal procedures that regulate how the contracts are executed or the conflicts are resolved, or, the subsequent and illogical amendments on the original contract. 

8. Failure to receive the items according to the specifications stipulated in the contract in terms of quality, quantity, date, and price.

9. Early payment before ensuring the receipt according to the appropriate terms, or, early payment without paying attention to the liquidity priorities of the organization, or, late payment in a manner that forces the suppliers to avoid re-contacting with the organization, or, the outbreak of financial/legal conflicts with a supplier, or, ignoring to benefit from the discounts that a supplier usually grants to clients. 

10. Missing documents, or chaos in the management of procurements or contracts.

11. Some suppliers receive their due amounts at different addresses, or, more than one supplier share the same address, or, a supplier and an employee have the same address. 

12. Social connections between one of the officials in the organization and a supplier.

13. Delay in renewing the supply and service contracts in a way that threats the organization regarding service/goods interruption, or deprives the organization of studying the alternative opportunities in the market.

14. In large procurements and contracting transactions, the price of each item is not specified, only focusing on the total price.  

15. Delaying or creating obstacles in any process that aims at enhancing the procurement cycle/management.

16. The increase in the number of resignations in the procurements and contracts department.

17. The lack of cooperation between some of the employees of the procurement and contracts department and the employees of the internal control departments (internal audit, risk management, compliance, quality, and security) as well as the external control staff (external audit and audit bureau), and dumping them with useless information and wasting their time in irrelevant requirements. 

18. The head of the procurement and contracts department prohibits his subordinates from directly dealing with the staff of the internal and external control activities, or, the unusual generosity and humbleness in dealing with some staff of the procurement and contracts department and the staff of the external control department. 

No community will ever be pleased to see corruption in its organizations; to combat corruption, senior leaders of organizations are not required to be doubtful about the employees, however, they are required to establish a culture of transparency and accountability. “All of you are shepherds and each one is responsible for his flock”.