This article is an excerpt from The Art of Tendering: A Global Due Diligence Guide, which is available for purchase.
In its April 2009 report, the Alberta Auditor General found that Bow Valley College lacked the appropriate checks and balances to guard against inappropriate contract approvals. According to the Auditor General, this lack of clear contract approval protocols contributed to the alleged misappropriation of $189,000 by a College director. The report called for the creation of stronger internal controls, along with ethical guidelines that included clear reporting protocols in instances where staff suspect spending irregularities.
The Auditor General found that this lack of proper contract approval protocols allowed a director within the Bow Valley College International Educational and Workplace Training Department, referenced as the IED, to approve the award of contracts and the payment of invoices for expenditures under $50,000 without seeking any further internal approvals. The director allegedly used this gap in internal governance to direct funds to his own businesses for work that was never completed:
Weaknesses in the College’s system of internal controls enabled the Director to allegedly prepare and submit invoices for payment of commissions to businesses controlled directly or indirectly by him pursuant to contracts for which no services were provided. The Director could initiate and approve personal services contracts without any secondary review, initiate and approve new vendors in the computer systems, initiate and approve invoices, and arrange to have the payment hand-delivered to his department. We identified opportunities for management to improve internal controls over contracts, vendor maintenance and payment processing, and improve processes for dealing with unethical conduct in the workplace.
To protect against similar future fraud, the Auditor General advised the College to establish proper processes to review contracts before they are signed in order to ensure that they are valid. It also recommended the creation of an appropriate selection method for the award of contracts, along with clear invoice payment protocols.
The Auditor General found that existing policies allowed College deans and directors to approve their own contract awards. It also noted that this practice ran contrary to the guidelines established in other College departments, which called for a separation of roles between the individuals who initiate a contract, approve its award, and approve invoices under the contract:
IED did not follow the typical guidelines other College departments follow when entering into personal services contracts with vendors. The Director initiated contracts with agents of international students that included terms and conditions different from those of the standard contract template. The deviations in certain contracts the Director signed were never reviewed or approved to ensure the College was aware of and had approved, the terms for paying commissions to these agents. We were advised by the College that the Director kept all signed personal services contracts with these agents in an IED file and did not share the final contracts with other departments. The Finance Department processed the vendor invoices without having copies of these contracts, so it could not match the payments to the contract. An effective control process would define separate roles for initiating and approving contracts.
Given this gap in the system, the Auditor General called for the creation and implementation of appropriate internal controls across all departments of the college.
The Auditor General also called for more transparency in the College’s vendor selection process. It observed that many personal services vendors were hired through “word of mouth” and that the College policy was silent with respect to an appropriate selection process. The Auditor General recommended the creation of clear rules to provide guidance on how to run a proper vendor selection process:
College policies did not provide guidance to departments on the proper process for contractor selection. As a result, IED did not use an appropriate method to evaluate agent vendors. Our interviews with staff revealed that the desired method for evaluating agents is to require them to complete a proposal for contract. But nearly all personal services contracts in IED were prepared without a proper proposal process. Only 1 of 13 personal services contract files related to these agents we tested had a completed proposal form. Staff said that an informal process was generally used for these contracts.
The report warned that the failure to implement these recommendations could compromise the College’s value-for-money objectives and increase the risk of future fraudulent activity. The Auditor General also recommended that the College’s ethics policy be enhanced to: (i) provide clear direction to staff on how to report suspicions of irregular spending activities; and (ii) provide protection to employees who report any suspected problems.
