This article is an excerpt from The Art of Tendering: A Global Due Diligence Guide.
Recent reports highlight how rushed spending increases the risk of irregularities and fraud in the government procurement process.
For example, in its May 2021 report entitled Preliminary Review: NAO’s role in reviewing Government’s measures relating to the COVID-19 pandemic, Malta’s National Audit Office (NAO) noted that the government’s emergency response to the COVID-19 crisis put good governance at risk. As the NAO stated, “the pandemic put national health systems under severe strain, disrupting global supply chains, causing volatility in financial markets, triggering consumer demand shocks and having negative effects across various sectors.” While the NAO recognized that “government had to act urgently to minimise the impact of the COVID-19 pandemic” it warned that “evidence-based studies in other countries related to similar situations note that the state of emergency in which Governments had to operate to deal with the immediate crisis increased the risks related to good governance.”
In fact, the COVID-19 crisis exposed widespread pre-existing vulnerabilities associated with the risk of fraud and bad governance in rushed spending situations. For example, in its May 2021 entitled Acquisition of 4–6 Grand Avenue, Camellia the New South Wales Auditor-General found that Transport for New South Wales, an Australian transportation agency, rushed a badly run process to acquire land for a light rapid transit project. As the report found, the process was run without proper oversight, with a lack of probity checks and balances, and with a lack of internal or external support. The Auditor-General found that the agency “did not obtain a formal valuation of the site, nor did it assess the financial impact of environmental remediation before the purchase.” Further, the report stated that the agency “did not have sound probity management controls in place for the transaction, and decision-making was rushed and poorly informed.” These due diligence omissions meant that the agency was “unable to demonstrate that the acquisition represented value for money for the State.” The Auditor-General concluded that insufficient probity practices exposed the agency to “a greater risk of corruption, misconduct and maladministration.”
Similarly, in its September 2020 report entitled Disaster Assistance: FEMA Should Take Additional Actions to Strengthen Fraud Risk Management for Public Assistance Emergency Work Grants, the U.S. Government Accountability Office (GAO) warned that work grants for debris removal and other emergency measures were subject to fraud risk including “bribery, collusion, and false invoicing” and that the Federal Emergency Management Agency “has not comprehensively assessed fraud risks to these grants as called for by leading practices in GAO’s Fraud Risk Framework.”
That framework, originally released in July 2015 and formally referred to as A Framework for Managing Fraud Risks in Federal Programs, contains the GAO’s recommendation for a four-part fraud prevention plan that includes the promotion of a public sector fraud prevention culture, the implementation of regular fraud risk assessments, the design and implementation of targeted fraud prevention strategies, and the assessment and adaptation of existing practices to help promote better fraud risk management. As the GAO observes, assessing and dealing with fraud risks associated with rushed government spending is the first step in dealing with rush-related risks in government procurement.
Furthermore, in its November 2020 report entitled Disaster Response: Agencies Should Assess Contracting Workforce Needs and Purchase Card Fraud Risk, the GAO recommended that federal agencies “assess fraud risk for purchase card use in support of disaster response.” The report referred to prior studies that “found that internal control weaknesses in agency purchase card programs—such as purchases without proper authorization or lacking evidence that the goods and services were received—left the government vulnerable to fraud, waste, and abuse”. It also referred to the above-noted Fraud Risk Framework as a source of “guidance for program managers to use when developing or enhancing efforts to combat fraud in a strategic, risk-based manner.”
Conversely, Audit Scotland’s October 2020 report, entitled Forestry and Land Scotland: 2019/2020 Annual Audit Report, noted that measures were already in place to deal with similar timing issues through the use of accelerated tendering procedures. The report also referred to Audit Scotland’s Red Flags Procurement guide, which “sets out a number of ‘red flags’ to consider and outlines a number of controls across the different stages of the tendering and procurement process.” As the October 2020 report noted, “these include training and staff awareness of procurement processes and procurement fraud, maintenance of a centralised contract register, maintenance and monitoring of registers of interest, segregation of duties, spend analysis, appropriate and defined authorisation limits and robust tender documentation.” Finally, that report concluded that “the controls and processes in place at Forestry and Land Scotland were found to be in line with those included in the red flags paper.”
However, as noted in a March 2021 report entitled Falkirk Council: Annual Audit Report to Members and the Controller of Audit -year ended 31 March 2020, these practices have not been universally adopted in Scotland. In fact, the report concluded that better fraud risk detection measures were required in relation to Falkirk’s procurement practices, which contained systemic weaknesses that created vulnerabilities in making real-time spending decisions. The report warned that “the inability to reconcile actual spend to contract awards creates a risk of error and could result in the Council being unable to monitor that contractual spend is in line with agreed values within mini-competitions”. The report concluded that a follow-up audit was required to focus on “the overall management of the risk of procurement fraud, including internal audit coverage”, as well as “the appropriateness of policies and controls around the procurement process, including segregation of duties and training to identify risks.”
As the recent audits illustrate, rushed procurements increase the risk of fraud and weak governance. Purchasing institutions should address these risks through the implementation of proper governance frameworks and enhanced staff training.
