Video Transcript

Red flags of corruption in procurement

Imagine an employee from the finance team comes to you with concerns another colleague is fraudulently buying alcohol. They've noticed just one invoice for a small purchase of alcohol that has incorrectly been entered on the wrong cost centre. In following up the officer finds a few more small alcohol purchases against other cost centres. What would you do? This is exactly the scenario faced by the city of Stonnington in 2013, and they chose to immediately bring in an external consultant to investigate.

After an extensive investigation investigators found that one employee had defrauded council of more than six hundred thousand dollars. The employee had been keeping his purchases below his financial delegation, so as not to raise suspicions of his manager. The purchase orders had been farmed out across a variety of cost centres, so excessive alcohol purchases were not noticed. He'd then been on selling the alcohol to help feed his gambling habit.

Council moved quickly. The employee was suspended as soon as the fraud was detected and the police were called. In November 2014 the offender was sentenced to 3 years and 11 months jail with a non-parole period of 18 months. The council has now introduced initiatives to help identify and prevent corruption in procurement, and has reinforced the importance of reporting suspicions among staff.

Purchasing goods and services and contracting external suppliers are everyday tasks in the public sector. Experiences like the City of Stonnington's show just how vulnerable procurement can be to corruption. Certainly through IBAC's recent investigations and reviews we've seen how processes can be exploited for personal financial gain. We've also seen how lack of clear processes combined with inadequate staff training, supervision and oversight can allow corrupt conduct to continue undetected. From our work, IBAC is able to share our insights on the warning signs that may show procurement processes are being corrupted and public monies misused.

The red flags can be visible right from the start of the procurement process, the quote or tender process, and submission stage. There are many signs that an employee is perhaps not doing the right thing. You may find that a particular employee or team are frequently using exemptions to circumvent competitive procurement, or that they’re being less than rigorous when it comes to accepting late bids or checking the validity of all bidders. Sometimes this is as easy to spot as the same business address details on multiple submissions.

An employee can favour a bidder in many ways and it may be down to the fact that they are friends or family with the supplier. The conflicted employee may write tender specifications in a way that favours one company or release additional or sensitive information to them to give them a competitive edge. Another sign that suppliers may be seeking advantage in what should be an even playing field, is using fake companies or companies of relatives or associates to submit dummy bids or to disguise relationships between suppliers and employees.

In IBAC's investigations we have seen blatant use of fake companies with different suppliers having the same address or with the same surname. Next we come to picking your preferred supplier. Conflicts of interest are an issue throughout the procurement process and this may be the reason that employees are frequently picking the same suppliers, selecting suppliers with the highest bid, or selecting bids well above the expected cost of the contract.

Employees may also, for whatever reason, not follow correct procedures when seeking approval to appoint a supplier. It could be not submitting the appropriate paperwork to support approval of supplier, or not maintaining paperwork like documentation of decisions. This may be because they're under pressure to get it all done quickly or because there is something to hide. Another red flag is when one employee undertakes all procurement tasks themselves. For instance, they determine the tender requirements, select the supplier, raise the purchase order and approve payments.

An interesting red flag that a supplier may be suspicious, is if they're hiring a losing bidder as a subcontractor on the job. Complaints from other bidders about the fairness or otherwise of the tender process can also be a sign that things aren't right.

Managing your contract and overseeing delivery and payment is the final step in the procurement process but there are still corruption vulnerabilities and red flags. A common concern is contract splitting, where employees negotiate with the supplier to split contracts into multiple jobs. This keeps payments within their financial delegations and removes the need for hire sign-off and approval.

Additionally employees may vary contracts following the quote or tender process, taking jobs well above expenditure thresholds. Employees may also raise purchase orders after invoices have been received or not at all. Invoices should be validated with supporting documentation, such as purchase orders to ensure that payments are for legitimate goods and services.

Creating a purchase order after receiving an invoice negates the effectiveness of this control. From the supply side, the quality of invoices tells a detailed story. Suppliers may submit false inflated or duplicate invoices. Invoices with insufficient detail or obvious mistakes can be a suspicious sign. Electronic payment systems should be able to pick up duplicate invoices. Of course a sure sign you're not getting value for money is not actually getting the goods or services you paid for. Alternatively, the job may be so poor you actually get complaints from staff or the community about the low standard that was delivered.

More detailed information on the red flags and specific control measures for public sector agencies to mitigate those risks is available at www.ibac.vic.gov.au.

In general, public sector agencies should ensure there are clear policies and procedures in place that govern procurement of goods and services, those policies and procedures are regularly reviewed, employees who are involved in procurement receive appropriate training in their accountabilities including how to identify possible corrupt conduct.

Procurement is identified as a corruption risk and is addressed through risk management processes, as well as planned and random auditing. There are clear mechanisms for reporting and suspected corrupt conduct. Whether you're buying office supplies, major equipment or contracting a consultancy or construction company, it's in everyone's interest that the public sector seek to ensure fair procurement and to build corruption resistant processes and checks. Billions of dollars in public funds are awarded through a range of contractual and tender arrangements every year.

And if our public sector can ensure value for money for Victorian taxpayers and ratepayers then employees will award contracts, as we expect with integrity and fairness. Agencies will build good reputations, as responsible and trusted organisations. The community benefits from high quality goods and services as intended, and honest hard-working businesses all have a good chance at securing government contracts.

If you're concerned that procurement processes are being corrupted there is someone within your agency who is trained to listen and act on your concerns.

Contact your agencies protected disclosure coordinator, or you can make a complaint directly to IBAC. The complaint must be in writing and can be made online at www.ibac.vic.gov.au If you need help to make a complaint, have difficulty accessing the form or need the services of an interpreter please call us on 1300 735 135.