Anti-Corruption Audits - ProcurementGuidance for Auditors

ByMuhammad Akram Khan

Former Deputy Auditor General of Pakistanmakram1000@gmail.com

http://issuu.com/makram100/docs/anti-corruption_audits-procurement-/0

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1. IntroductionProcurement consists of the whole process of acquisition ofgoods and services from third parties and spans from theconcept of acquisition to the end of useful life of theasset or termination of the service contract. It covers awide spectrum of goods and services from everydaycommodities like pen and paper and contracted out serviceslike maintenance of assets to construction of buildings andacquisition of IT equipment. It plays a central role in allgovernment functions from education and health to policingand security services. The governments around the worldspend large amounts of money on procurement of goods andservices. For example, OECD countries spend 15 percent oftheir GDP on procurement and in several non-OECD countriesthis figure is even higher.1In fact, the expenditure onprocurement is generally the largest item on the budgetafter payroll expenditures. Because of the huge businessopportunities that public procurement opens up, there is afierce competition among suppliers to get public contracts.The temptation lures the business firms as well as public1 Ehlermann-Cache, N. (2007). Bribery in Public Procurement: Methods, Actors and Countermeasures. Paris: Organization for Economic Cooperation and Development. Pp.5.

employees into corrupt practices. Bribes may involve largesums, reaching up to millions of dollars in large contractssuch as arms deals. In terms of percentage, the bribes mayrange between 5 to 25 percent of the contract value.2

The auditors need to understand the mechanics of corruptionin some detail. A simple corruption deal may involve briberyreceived by a public official (bribee) for awarding acontract to a supplier (briber). However, for concealingthis criminal act, sometimes the briber and the bribeeacquire the services of an intermediary who facilitates thecorrupt transaction, keeping both the briber and the bribeeat an arm’s length. The intermediary could be a consultant,architect, engineer, sub-contractor, or a staff member. Inlarge transnational contracts, it could be a legallydesignated agent of the multi-national consortium ofcompanies bidding for a contract. The bribees may notreceive the bribe directly. They may designate natural orlegal persons for diverting bribe funds. Bribees can invokeseveral methods to hide the bribe. For example, the bribecould be a direct cash payment received secretly, a form ofconsulting fee, a remuneration for false services,overpayment for goods and services, delivery of material forthe pursuit of private benefit of an agent, payment to afront company owned by a bribee or transfer of funds to abribee’s hidden bank account3. It is also possible that withthe collusion of public officials, some tenderers bribecompetitors to keep them away from competition. Banks mayalso get involved in laundering the corrupt funds. Thus itmay become a complex cobweb of transactions, making itdifficult to trace and understand the corrupt deals. The corruption can permeate through various stages in theprocurement cycle. It can take the form of bribery forgetting registered as a vendor, manipulating specifications,obtaining insider information, reducing quality or quantityof goods supplied, clearance from inspectors and expeditingpayment. At each stage diverse corrupt practices and

2 Ibid. Pp. 49. 3 Ibid. Pp. 50.

methods may be used. The corrupt people can deviseinnovative techniques for achieving their objectives. Withdevelopments in anti-corruption practices, there isconcomitant development in corrupt methods and techniques. Fight against corruption requires a multi-pronged attack. Itrequires political will, anti-corruption legislation,independent anti-corruption agencies, and wide scaletraining of government employees in ethics. Part of thefight against corruption can also take the form of well-focused audits by independent auditors. However, we need tounderstand the framework within which the auditors can playa role in fight against corruption. Corruption, as compared to fraud, is difficult to detect. Incase of fraud, the fraudster manipulates official records insome form and leaves some telltale, which can lead touncovering of the fraud. In case of corruption, the personwho receives bribe, or uses his influence to get an unduebenefit for himself, family or friends or abuses hisauthority for some monetary benefit does not leave any tracein the official records. The auditors, who mainly rely ondocumented evidence or physical observation, find itdifficult to detect corruption. However, they can play animportant role in preventing corruption. They can identifyopportunities for corruption in the laws, applicable rules,regulations, and procedures by taking an incisive andimaginative look at the procurement cycle. On the basis oftheir assessment they can make recommendations for improvingthe systems and procedures. However, the auditors can playthis role only if they are completely independent of theprocurement process. There could be occasions when they areasked to advise or sit on committees dealing with aprocurement assignment. In that case, they should not auditthe assignment. Further, the auditors should be independentin deciding the audit methodology. They should have free andunrestricted access to all information and should havefreedom to conduct interviews and visit sites.

Objective and scope of the paper

The objective of this paper is to provide general guidelinesto auditors for the audit of procurement with a specialfocus on anti-corruption. Section two of the paper sets thestage 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 abrief introduction to audit planning. Section four providescomprehensive criteria on audit of procurement. The auditcriteria sums up good management practices in procurementwith a focus on anti-corruption. Section five deals withassessment of corruption risk in procurement. It consists oftwo steps: (a) building an inventory of corruptionopportunities; and (b) applying corruption opportunity test,leading to development of the most likely areas ofcorruption. Section six discusses audit execution. Thesection provides guidance for writing audit program withanti-corruption focus. The section is intended to sharpenthe auditors’ sensibilities about corrupt practices inprocurement. Section seven deals with audit reporting andguides the auditors to the type of recommendations they canmake for forestalling corruption. Procurement could be responsibility of one centralizedagency in the whole of government or it could be adecentralized function in each department. In the lattercase, the departments assign this task to a dedicatedsection. In this paper we are using the term ‘procurementagency’ in a generic sense and is applicable to acentralized agency in the government or to a section withina public entity.

2. Procurement CycleProcurement planning

Effective procurement starts with the preparation of annualprocurement plan. The plan visualizes, broadly, requirementof goods and services and mode of procurement, inparticular, if a method other than open tendering has to befollowed. The objective is to assess the requirement in

sufficient detail before the year starts, reducing the needfor exigency procurement. In some organizations, skeletalprocurement plans are also prepared for the coming two tothree years. Some organizations also prepare a micro-levelassignment plan for all significant procurements included inthe annual plan. Besides determining the objectives, theassignment plan conceives the manner of approaching themarket, enlists all tasks relating to the assignment withresponsibilities and target dates and expected outputs. Theassignment plan also enumerates specific risks relating tothe assignment and assessment of any requirement forexternal expertise. Before the plan is finalized theprocurement agency undertakes market research to have a goodunderstanding of the available products and prevailingprices. The assignment plan can be used as a benchmark tomonitor and evaluate the actual performance. Tendering

Actual procurement process commences with specification ofgoods and services to be procured. The user sectionsgenerally prepare the specifications. The procurement agencyguides and requires revision of the specifications by theusers so that they are as generic as possible, given theneed of the users. Once the need is defined, theprocurement agency decides how to approach the market. Ifthe goods and services to be procured are simple,straightforward and standardized, the procurement agencyinvites open tenders through wide publicity. However, if theprocurement is complex and cost of tendering high, there maybe a need to build a list of potential suppliers through amulti-stage tender process. In such cases, the procurementagency requests for expression of interest through an openinvitation and evaluates suitability of the applicants interms of pre-defined criteria. The criteria are defined interms of past experience, financial capability, technicalcompetence, range of products and services being supplied bythe firm, etc.

Request for proposals

The procurement agency usually invites requests forproposals (RFP) if the requirement is defined in terms ofcertain objective to be achieved that may require goods andservices. The RFP enables the prospective bidders proposesolutions and methods for the problem at hand for achievingthe objective. In doing so, they submit technical solutionsas well as price of the solution in financial proposal.Generally, the procurement agency requires the RFPs in twoseparate sealed envelopes, each containing technical andfinancial proposal. Evaluation of bids and award of contract

Evaluation of open tenders for standard goods and servicesis straightforward. The bidder is selected on the basis ofevaluation of financial proposal only. The criteria forfinancial evaluation need not be the lowest price in eachcase. It could be the best price in light of life cyclecosting. In case of RFP, an evaluation committee evaluatestechnical proposals as a first step and opens financialproposals only for those who meet threshold of the technicalevaluation. The committee records basis of itsrecommendation that is kept in the procurement file forfuture reference and for meeting any protests or challengesby unsuccessful bidders. The procurement agency awards thecontract on the basis of recommendations of the bidevaluation committee. In large organizations the contractdocument is a standard template that contains generallyapplicable conditions besides the specific performanceexpected from the contractor. The procurement agency alsoinforms the unsuccessful bidders about the award of thecontract with an offer to debrief them on their respectivebids. Evaluation of bids leads to approval, signing andexecution of contract. The procurement agency monitorsdelivery of goods and services by the contractor. Therecould be a system of inspection, certification orverification of quality and quantity before invoices areprocessed. Vendor evaluation

Well-run large organizations usually have a system of vendorevaluation. The objective is to screen the vendors on thebasis of their performance so that sub-standard vendors donot get a future contract. It also guides the procurementstaff about vendors who meet high standards and can berelied upon in times of exigency. Reporting procurement

An essential step in ensuring honesty in procurement is toreport all procurements, with details of quality andquantity, rates and sources. The information is posted atthe public entity’s website besides issuing an annual reportby the procurement agency.

3. Audit Planning Audit objective

The objective of procurement audit would depend on the typeof audit. In case of internal audit, it could be compliancewith rules, regulations and procedures; for performanceaudit, it could be assessment of economy, efficiency andeffectiveness; in financial audit, it could be truth andfairness of the information. Whatever the type of audit, theauditors can build an additional objective in the audit planto focus on possibility of corruption in procurement and formaking suggestions to prevent corruption. Familiarization

The audit process will commence with a detailed review ofapplicable laws, regulations, rules and procedures. Itwould enable the auditors understand the mandate, mission,objectives and main operations of the organization andinform them about its structure, staffing, locations,clientele and operational plans. As part of thefamiliarization process, the auditors would reviewprocurement plan of the organization. The auditors shouldunderstand the procurement procedure, responsibilities ofvarious 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 shouldfamiliarize themselves with thresholds of open competition,informal quotations, and single tender or limitedcompetition. The procurement agency may have concluded somesystem contracts. The auditors should review these files tounderstand these contracts. As part of the audit planning,the auditors should select a sample of procurementassignment plans for having a sound understanding of theprocurement activity in the organization. While doing sothe auditors will remain alert to the identification ofpossible opportunities for corruption.

4. Audit Criteria As an essential step in planning, the auditors specify theaudit criteria against which they would examine the actualfunctioning of the auditee. In case of financial auditing,the criteria consist of generally accepted accountingprinciples, and applicable rules and regulations. Forperformance auditing, the audit criteria are derived fromthe generally accepted management principles. In corruptionaudit, the criteria consist of applicable laws, rules andregulations, as well as generally accepted managementpractices. While auditing procurement, the auditors wouldlay down the audit criteria in terms of the expectedpractices from the procurement agency. These criteria wouldconsist of two types: (a) general (b) specific. The generalcriteria refer to the principles of good governance that theprocurement agency is expected to observe. The specificcriteria consist of good practices in procurement with afocus on anti-corruption. In the following discussion wehave attempted both types of the criteria. However, thesecriteria are only illustrative. In actual practice, theauditors would modify these criteria in light of groundreality. 4.1 General CriteriaConflict of interest

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

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

(c) The contractors of the organization should agree thatno official of the organization has received or willreceive from the contractor any direct or indirectbenefit arising from this contract. The contractorshould agree that the breach of this provision is abreach of an essential term of the contract.

(d) The procurement staff should not accept any gifts,invitations for meals, or offers of tickets for sportingor cultural events, holiday trips or other substantialhospitality from vendors. They should also not requestany transport facility from the vendors. They should notaccept any offer of accommodation for overnight stay bythe vendors except where the circumstances are such thatthere are no other alternative arrangements.

(e) There should be a realistic and meaningful timeframe inwhich former senior level executives may not solicitemployment with government contractors who significantlybenefited from policies they formulated while in office.

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

(g) The requisitioners for procurement of any goods orservices should not recommend any vendor. It compromisesthe rule of segregation of responsibilities between therequisitioning and the procurement personnel.

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

(i) The persons having an actual, perceived or potentialconflict of interest should not be involved in theprocess of evaluation of bids, selection of bidder oraward of contract.

(j) The members of bid evaluation committee should not haveauthority to approve award of the contract as itcompromises the essential principle of segregation ofduties.

(k) The procurement staff should declare, on joining theservice and thereafter every year, their privatebusiness interests (for example, shareholding of acompany, or relationship with directors or other keymembers of a business firm, etc) that may potentiallyconflict with their professional duties. There should bea system in the organization for verifying thesedeclarations.

(l) In complex procurement assignments spreading over anextended period of time, the dealing staff, consultants,and approving authorities should declare any conflict ofinterest at the beginning of the assignment. Since thestatus of conflict of interest may change during thecourse of procurement, there should be a requirement toupdate these declarations during the procurementprocess.

Transparency

(a) The procurement agency should release sufficientinformation so that an ordinary person can understandthe manner the system is supposed to work and the way itis actually working. It should include information onlaws, rules, regulations, procedures, institutions andpersons involved and forms to be filled. It shouldprovide the information in a timely manner indicatingthe timing for various actions. It should also announce

the type of information it would be willing to provideon request.

(b) For open communication, the procurement agency shouldorganize bidding conference for potential bidders, whererules, regulations and procedures relating toprocurement are discussed and an open dialogue takesplace between the public officials and the privatesector representatives. Such conferences should be partof the information dissemination campaign of theprocurement agency.

(c) The procurement agency should avoid informalcommunication with potential suppliers. It shouldestablish ‘point of contact’ for enquiries frompotential suppliers. There should be no other channel ofcommunication except for handling any complaints or bidprotests. The procurement agency should appoint a seniorperson to approve all correspondence with the potentialbidders so that consistency is ensured and favoritism isforestalled.

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

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

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

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

(h) The procurement agency should maintain record of allprocurement to show that it followed a due process, andtreated all bidders fairly, responded to all enquiriesfrom the unsuccessful bidders and has all evidence foraudit purposes.

Open door policy

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

(b) There should be a regular system of meetings andsharing of information with representatives of the staffand listening to their concerns on possible departuresfrom good and ethical practices.

Risk management

(a) Procurement, like other government activities, involvessome risk. The procurement agency should carry outassessment of corruption risk for each stage of theprocurement cycle.

(b) The procurement agency should ensure that it usesproperly trained employees for each type of procurement.If the procurement agency engages an agent or aconsultant, it should assign the agent or the consult toa senior person with appropriate delegation ofauthority.

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

Database on procurement

(a) The procurement agency should maintain a centralizeddatabase of contractors. The database should provideinformation also on civil judgments, criminalconvictions, settlements and fines and any other costimposed on contractors. The procurement agency shouldconsult this database before awarding any contract.

(b) The database should have information on past purchasesto serve as a reference for future procurements. Thedatabase should provide information on variousprocurement indicators such as average time taken tocomplete a procurement process, value of procurement,percentage of completed procurement processes, extent ofcompliance with regulations, etc.

4.2 Specific CriteriaProcurement plan

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

(b) The procurement plan should be updated periodicallyduring the year, as it tends to get outdated withoccurrence of events.

(c) The procurement plan, with probable date ofannouncement of bid invitation dates, should bepublicized so that potential suppliers are able toorganize themselves for bidding.

Requisitions

(a) The requisitioner should draw specifications, as far aspossible, in a generic manner that does not favor anyparticular vendor or brand or product. The onlyexception could be the cases where the organization hasexplicitly adopted a policy to buy a standardized item

and that too should be for a limited period of time. Insuch cases also, the requisition should mention the word“or equivalent” with the specifications.

(b) Where a requisitioner in the organization makes arequest for a proprietary item, the request should comewith a written justification duly approved by acompetent authority.

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

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

Vendor registration

(a) The organization should have a clear system ofregistering vendors. The conditions for registrationshould not be unduly restrictive. Generally, they shouldrelate to (i) capital and liabilities; (ii) compliancewith tax and labor laws; and (iii) not being blacklistedpreviously. The criteria for registration could requirethe firms to submit evidence of internal managementsystems that promote integrity such as code of conductfor staff and sub-contractors.

(b) If the organization decides to de-register a vendor forunsatisfactory performance, it should inform the vendorwith reasons. It should also afford the vendor anopportunity to make a representation or to rectify anydeficiency in due course of time with a provision forregistering it again if it meets the organization’scriteria. Such re-registration should not take placeuntil a certain period, say six months, expires.

(c) The organization should follow a due process of law fordebarring a company from bidding on the basis of pastpoor performance or unethical and corrupt businesspractices. The decision to de-register a vendor shouldbe taken by a committee and not by an individual. Anyrepresentation made by a vendor on the decision of theorganization to de-register it should be reviewed anddecided by a committee and not by an individual. De-registration should lead to debarring those firms, whichhave been convicted for corruption or fraud in the pastor 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

4 Need not be said that this requires a centralized database on the pastperformance 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.

expression of interest. However, the Request forExpression of Interest (REI) should not single out orfavor a specific supplier. The REI should be widelyadvertised, including posting on the organization’swebsite.

(b) The REI should offer to hold briefing sessions with thepotential suppliers for answering questions andproviding level playing field to all.

(c) If a site visit is necessary, the organization shouldoffer the opportunity to all potential vendors.Similarly, the procurement agency may require visitingfacilities of the potential vendors. In that case, atleast two persons should visit the premises of thevendors.

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

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

(f) The procurement agency should inform the firms whichcould not qualify for short-listing and offer to debriefthem.

Bidding process

(a) The procurement agency should employ a competitiveprocess for getting best value for money. All qualifiedregistered vendors must be invited to participate in aprocurement requirement. Emergency purchases should bedone following a prescribed procedure and with the priorapproval of a competent authority.

(b) Any information provided to one firm, at own initiativeor in response to some query, should be provided to alland at the same time. The organization should notprovide any information to a firm that did not get thesolicitation documents.

(c) All prospective bidders should be informed aboutquantity, quality, budgetary limits and specificationsto be observed. The invitation to bid should alsospecify the information required, bid evaluationcriteria, conditions for participation, minimum contentand format requirements and various deadlines. Thetender documents should enclose standard contracttemplate containing mandatory requirements relating toethical standards, conflict of interest, transparency,and security of information.

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

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

(f) The solicitation documents should clearly state thatthere would be no contact between the bidders and theprocurement staff before the bid closure date exceptwith an authorized person and that too in a transparentmanner. However, this does not preclude the possibilityof a pre-bid conference or a site visit or survey, thedates and arrangements for which should be announced toall prospective bidders in the solicitation documents.The bidders who express their desire to participate in

such events should submit their questions in writing, atleast, say, seven days before the event so that writtenreplies are prepared in advance and approved by thecompetent authority. These answers should be distributedsoon after the conference among all participants. Duringthe meeting only written questions submitted earliershould be discussed. There should be no open-endeddiscussion on written questions. If such questionsarise, they should be noted and replied in writingseparately later on to all participants of theconference.

(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 submittedbefore the closing date of the bids.

(i) Invitation to tender should allow sufficient time forpreparation of the bids. Normally, time should not beless 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 concernedand all waivers should be documented and approved by acompetent authority.

(l) The person responsible for receiving the bids shouldnote on the envelope the date and time of receipt andkeep all bids under lock until due date and time ofopening.

(m) All bidders should get invitation to attend the bidopening session. At least two persons not related withthe evaluation should open the bids in presence of thosebidders who choose to attend.

(n) The record of bids opened must be kept on a controlsheet and every page of the original bid document thatcontains a price figure must be witnessed and initialledby both openers.

Bid evaluation

(a) The organization should announce the criteria forevaluation of bids to all prospective bidders whilecalling for bids. It should specify any preference tolocal or domestic suppliers from the outset to forestallcorruption and maneuvering of the competition. Anyalterations in the announced bid evaluation criteriashould be brought to the notice of all bidders, allowingthem sufficient time to re-submit their bids.

(b) The evaluation team can decide to conduct sites visitsas part of the evaluation process for assessingcapability of the tenderers to deliver the goods andservices. However, they should afford this facility toall bidders. The visits to all bidders should be of thesame duration. The visiting team should not (i)entertain any change in the price or service level bythe bidders; (ii) should not comment on the status ofcontract at this stage; and (iii) should not seekclarifications or information that may be construed toprovide a gain to one bidder over the others. Theevaluation team should duly document the informationcollected and the situation observed during visits.

(c) The evaluation team may decide to interview the biddersor attend presentations by them to seek more informationor to clarify any ambiguities. In that case, thereshould be no private contacts at individual levels. Aminimum of two persons should always be present for suchencounters. Interviews should not be a basis forrevising the bid price or alter service level.

(d) As part of the evaluation process the team may decideto check antecedents of the bidders to ensure that theyhad not been involved in any unethical dealings in thepast. In that case, all information received should bedocumented but kept confidential.

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

(f) In case of RFPs, price information should not beannounced at the time of bid opening as it may involvecomplex variables and a thorough evaluation beforecomparison is possible. However, in other cases, the bidopening committee should read aloud the priceinformation for each item or at least the grand total ofthe total items to be supplied by each bidder.

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

(h) Separate teams should evaluate technical and financialbids. Financial bids should be opened only for thosebidders that meet the technical threshold forqualification. Other envelops should be retained un-opened.

(i) All members of the evaluation team should assess thebids independenltly. Subsequently, the team membersshould hold discussion for reconciling any widevariations in their respective assessments and foragreeing on a final recommendation. The team shouldrecord its recommendation on the Tender EvaluationMatrix sheets. They should make comments to supporttheir scoring and also note if any bid is non-compliantwith the invitation.

(j) Financial evaluation of bids should be on the basis oflife-cycle costs. Further, it should take into accountother conditions such as warranty period, settlementdiscounts, after-sale service, and training of staff,fixed and variable costs, residual value, and any hiddencosts, etc.

(k) The Tender Evaluation Matrix sheet should havesufficient details to enable the team members debriefthe unsuccessful bidders or help the organization inpost-bid negotiations. The technical and financial teamsshould then meet to agree on a final ranking of thetenders.

Negotiations after original bids

(a) Once the bids have been evaluated, it is generally notadvisable to enter into negotiation with the successfulbidder. However, if the organization considers that anegotiation exercise would add value to the procurement,more than one person should carry this out and finaldeal should not indicate that the rejected bidders havebeen put to a disadvantage. It means it should notcreate an impression that a similar negotiation wouldhave allowed other bidders improve their offers. Thediscussion should take into account the generalprinciple of transparency, equal treatment and fairnessto all.

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

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

Exigency procurement

(a) The procurement agency should follow exigency purchaseonly if there is evidence that the exigency did notarise by delay in timely planning or by poor managementor by delay in budget allocation. The exigencyprocurement should be within the budgetary limits andthe competency of the ordering authority and should belimited to the extent the exigency continues.

(b) All exigency purchases must have a writtenjustification signed by an appropriate competentauthority. A proper justification would be such asfollows: (a) the operational efficiency of theorganization would be affected severely; or (b) thesituation would be out of control; or (c) there would bea threat to public health, security or welfare; or (d)an unforeseen situation was likely to lead significantlosses 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 andniche 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 andformal bidding is unlikely to reveal more suppliers.

(d) Formal bidding would be uneconomical, unrealistic orinefficient.

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

(f) Compatibility with existing equipment is essential andthat can be achieved only through procurement from asole source.

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

Award of contract

(a) There should be no leakage of information aboutprobable acceptance or rejection of a bid until a finaldecision is taken and announced with the permission ofthe competent authority.

(b) The information on the award of the contract should beposted on the official website of the organization. Itshould also be communicated to all who offered theirbids, whether successful or unsuccessful. Theinformation should also briefly mention the pricefinally accepted and the basis for giving the award.However, information on bids not accepted need not bedisclosed because transparency beyond a certain limitcan create environment conducive for oligopoly in futurecontracts.

(c) Before signing the contract, the contractor and theorganization should sign an “Integrity Pact”, in which

both sides agree not to indulge in corruption, and todisclose any commissions, kickbacks or bribes paid ordemanded.

(d) The award of contract should be processedexpeditiously. The number of clearances required shouldnot exceed three levels in any case.

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

(f) The organization should weigh the decision to extend orrenew the contract in light of contractor performance,contractual obligations, user satisfaction, marketdevelopments and financial outlays involved. Theextension of the existing contract should be consideredif it is economical and effective to do so. Thejustification should be documented and approved by acompetent authority.

(g) The organization should offer to debrief theunsuccessful bidders, which if taken up, can be givenover telephone or by face-to-face meetings (depending onthe supplier preference). Any debrief given over thetelephone should be read out, with the date, time andname of supplier's representative being recorded. Ifgiven face-to-face, there should be at least twodepartmental representatives present. As far aspossible, the debrief should be delivered from aprepared "script".

Contract execution and inspection of supplies

(a) As far as possible, responsibilities for procurementand contract administration should lie in differentsections of the organization.

(b) The goods or services supplied should be in accordancewith the statement of work. Any substitution by thevendor should be approved by the requisitioner, whoshould also certify that quality of the substitute issame or similar to the one specified at the time ofaward of contract.

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

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

Invoice payment

(a) The contract administration should ensure that thevendor gets all payments promptly according to theschedule.

(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 tochallenge the action of the procurement staff againstthe announced standard. There should be anindependent (outside the procurement agency) mechanismto handle complaints from vendors against theprocurement action such as violation of secrecy,unfair competition, evaluation of anomalies, and unduefavor to competitors, etc. The mechanism shouldprovide for a due process and formal resolution of allcomplaints, taking them to the logical conclusion ofinforming the complainant about outcome of thecomplaint. The complaint handling mechanism shouldfollow a certain time frame. It should not be an open-ended system.

(b) The complaint handling mechanism should have a setof remedies for the complainant if the complaint isbased on facts. The remedies could be in the form ofre-bidding if the protest is within the standstillperiod, suspension of the contract, or compensation tothe aggrieved bidder for any damage, etc.

Vendor performance

(a) The contractor should be made aware of the expectedservice levels, exact specifications, design anddurability of the project before they are adopted asbenchmarks for vendor performance. The procurementagency should monitor the performance of the vendorsagainst these benchmarks and keep the vendor informed ofany adverse findings.

(b) The organization should award contracts only if thepast performance of the vendor had been satisfactory.The vendor performance should be evaluated against suchindicators as: (i) fulfillment of delivery schedules;(ii) compliance with terms and conditions of thecontract; (iii) quality of goods and services suppliedby the vendor and any significant complaint(s); (iv)cooperation of the vendor in redressing thecomplaint(s); (v) failure to disclose any materialinformation; and (vi) undue delay in performance of thecontract; (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 riskin the organization. It would consist of two steps: (a)building an inventory of corruption opportunities; (b)assessing the likelihood of corruption. The followingdiscussion elaborates these two steps.

5.1 Building Inventory of Corruption OpportunitiesThe auditors will review the basic documents of theorganization, interview persons and observe procurementprocess in practice to assess the corruption risk. Theobjective would be to judge a theoretical possibility ofcorruption, given the nature of business and the procurementsystem in vogue. Some of the rules and procedures may beinstrumental in promoting corruption or at least clever

persons may manipulate them to their advantage throughcorrupt means. In some cases, procurement agencies maypurposely frame complex procedures, having a cost for thesuppliers, and create an incentive for indulging incorruption rather than bearing the cost of compliance withthe procedures. It is, therefore, important that theauditors have a close and incisive look at various rules,regulations, procedures and informal practices. They shouldtry to imagine if and how some of these can be misused forundue favors and gains. They should carefully list down allsuch possibilities and try to compile an inventory ofcorruption opportunities. The following discussionelaborates some of the possibilities that the auditors maycome across in a large procurement agency. However, this isneither exhaustive nor conclusive.Identification of needs and design of tender

(a) As a matter of good practice, the public entitiesshould avoid procuring different brands of a product tosatisfy individual preferences. They should standardizethe items of routine use for availing economies ofscale. The auditors should remain alert to situationswhere a public entity procures different brands andmodels of the same thing. Such practices have apotential for indulging in corrupt practices.

(b) In technically complex procurements, the public entitymay not have enough information on goods and services tobe procured. They may contact one of the large suppliersto provide information on aspects of technology orfunctionality of the products. Although the initialcontact may be with good intentions, yet it can opendoor for corruption as the firm may influence finaldesign of the tender inquiry. In the process, theprocurement staff may get involved in bribery from thefirm for designing the contract that suits the latter.

Vendor registration and selection

In case of multi-stage tendering where the procurementagency invites expression of interest and then short-liststhe suppliers, the opportunity for corruption exists. Theagency may not define the qualification criteria clearly ormay 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 andwithout bias.

Bidding

(a) The auditors should remain alert to the fact thatcompetitive bidding by itself is no guarantee for honestprocurement. In fact, a lot of corruption is generallyhidden behind the otherwise competitive procurementthrough ‘open bidding’. The competing firms try to bribethe public officials to gain market power. Competitionitself induces corruption in some cases!

(b) A lax environment in receiving and safeguarding bidscan promote corruption. Opportunities for corruptionexist if (i) the bids re received and record of thetime of receipt is not kept; (ii) the bids are notsafeguarded for confidentiality; (iii) bid opening isdone by one person; (iv) bidders are not invited toattend the bid opening session; (v) the minutes of thebid opening committee are not recorded and signedmeticulously.

(c) Acceptance of late tenders as a matter of courseindicates an opportunity for corruption. Generally, latetenders should be rejected and envelops with datedstamps in evidence of late receipt should be kept onfile. Non-observance of this practice could have motiveof favoring some tenderers over others.

(d) If all tenders except one are non-compliant, and if theprocurement involves major financial outlays, themanagement should recall tenders. However, if it doesnot do so on the plea that recalling tenders would beuneconomical or would cause unnecessary delays, the

auditors should probe the matter deeply. There could beopportunities for corruption in such cases.

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

(f) Opportunity for corruption exists if the procurementagency enters into negotiation with some selectedbidders (not in the order recommended by the evaluationcommittee), as such a practice does not treat allbidders fairly and equitably.

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

(h) Frequent unsuccessful and inconclusive open tendersleading to negotiated contracts may also indicate anopportunity for corruption.

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

Single tender

(a) There could be a situation where single tender isresorted to on the plea that a vendor has recentlycompleted a contract satisfactorily and re-ordering thesame product at the previous prices would be economicalthan getting into a re-tendering process. The argumentis justified in case the re-ordering level is low. As abenchmark, the re-ordering should not be more than 50per cent of the previous volume or invoice. If theauditors see that single tender has been resorted to forquantities that are in excess of this benchmark, theyshould suspect some corruption.

(b) The auditors should be alert to a number of similarsmall contracts concluded on the basis of single tenderon the plea that the amount involved was below thethreshold for open tenders. There could be a case ofsplitting a large procurement into several smallcontracts for avoiding open tendering. Likelihood ofcorruption in such cases is higher.

(c) Where unusually large volumes of goods and services areobtained 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 areseveral providers of goods and services in the market, therisk of corruption increases as the staff of the publicentity can indulge in extortion of bribes due to itsmonopoly power

Variations in bid description or contract

(a) One of the standard techniques for corruption isto vary the bid description during evaluation processfor benefiting a particular supplier. The auditorsshould closely examine the variation if it haseffectively benefited a particular bidder.

(b) Sometimes the procurement agency modifies theoriginal contract to accommodate changing requirements

and needs of the users. If the auditors find that suchchanges are frequent and the revised cost hasincreased the original cost materially or the scope oforiginal work has increased significantly, they shouldbe alert to the possibility of corruption. Themanagement would usually justify these changes on thebasis of exigency, cost of re-tendering or efficiency.However, these excuses could be only attempts toconceal corruption.

Layers of sub-contractors The main contractor for supplying goods and services mayengage a sub-contractor, who engages another sub-contractor,who engages another, and so on. If the auditors find such asituation, the likelihood of corruption increases, as itbecomes difficulty to track all transactions to theirorigin. Cost-plus contracts

The contract may provide that the contractor would invoiceat his cost plus a mark-up. While the intention is to keepthe cost to a minimum, the possibility of corruption in thisarrangement increases. The main contractor creates shellcompanies who bill the contractor at inflated rates on whichthe contractor adds a mark up as per contract. Thus, theorganization suffers twice: once by inflated invoices from ashell company owned by the contractor, and then by way ofagreed mark-up. Usually, the procurement staff is aware ofsuch arrangements but remain silent on receipt of briberyfrom the contractor. It is a case of fraud and corruptiontogether. The auditors should be overly alert on theimplementation of such contracts. They should compare thefinal prices charged to the organization. Also, they shouldget detailed ownership and managerial staff details of thesubsidiary companies that provided the goods and services tothe main contractor. Framework or systems contracts

Framework or systems contract are usually favored if anorganization has to procure large quantities over an

extended period and at different locations. The userdepartments or procurement agencies at all locations areinformed of the terms and conditions of the contract and areauthorized to buy within their respective budgets from thecontractor as the need arises. Such contracts are prone tocorruption because of the volume of the business that thecontractor would get. The vendors would like to bribe theprocurement staff. However, they get the support of thestaff to insert some compensatory clauses in the contractthat covers their cost of bribery. For example, the unitprice may be kept flexible to include cost of transportationand timing. The flexibility provides avenues for billing theorganizations at higher than due rates. The auditors shouldcarefully scrutinize such contracts and select them foraudit in their sample. Localism in contract

(a) Some organizations award contract to localsuppliers in breach of regulations on the plea thatthe local economy has to be boosted or local suppliersshould get a preference over outsiders or local jobsshould be protected. Such contracts often havepossibilities of corruption.

(b) The international vendors, at times, pay largeamounts of fees to local representatives for providingvarious services. Such fees, usually, have anunwritten share of bribe money to be paid to theprocurement staff for getting a contract. Auditors canspot these sums only if these vendors explicitly buildthese fees in the cost of the goods or services to besupplied by them.

5.2Assessing Likelihood of Corruption Once the auditors have built the list of corruptionopportunities in procurement, they should proceed to preparea short-list of these opportunities in the environment ofthe organization on the basis of likelihood of actualcorruption. They can make this assessment by applyingCorruption Opportunity Test (COT). Objective of the COT is

to determine if actual circumstances prevailing in theorganization are conducive to corruption and if so, to whatextent. It is possible that the systems and procedures ofthe organization are not robust, yet the culture of theorganization or the overall environment acts as a deterrentand people do not indulge in corruption at a significantscale. It could be vice versa as well. The systems andprocedures of the organization may be quite robust, yet theactual practice may provide opportunities for corruption dueto environmental reasons, tone at the top, or non-implementation of rules against corruption. Thus Inventoryof Corruption Opportunities is a theoretical possibility. Byapplying COT, the auditors go a step further and assess thelikelihood that the opportunities for corruption areactually being availed by corrupt people. If they assessthat the opportunities for corruption exist and theprobability of their existence is high, then they shouldincrease the sample size accordingly and plan an extensiveexamination of organization’s operations. A summary of theresult of COT will lead to definition of Most Likely Areas ofCorruption in the organization under audit. It would consistof a short list of Inventory of Corruption Opportunities.The short list would be the basis for further fieldworkduring audit execution phase. Developing Corruption Opportunity Test

Each corruption opportunity is based on some indicator ofcorrupt behavior. The auditors should look for existence ofthese indicators while applying the COT. The auditors willhave to go around and feel for themselves how the businessof the organization is being conducted in practice. Theywill need to interview key persons in the organization forhaving a fairly accurate understanding of the organizationalenvironment. It is possible that rules and regulations areadequate but in practice they are being violated and bentaccording to whims and wishes of certain people. Whilereviewing the list of corruption opportunities, the auditorsshould 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 corruptintentions?” Or“Are there controls in place that would forestall a corrupt person from indulgingin corruption by abuse of authority or misuse of discretion or misinterpretationof rules in this case?”

While reviewing the environment of the organization, theauditors should quantify their judgment on a scale of 0-9,where zero stands for a dry land and 9 for a green pasture forcorruption. As a general rule of thumb, an organizationscoring an aggregate of 70% or above on COT is a greenpasture for corruption and immediate action is required tostreamline its systems by changing laws, regulations andmanagement practices, including replacement of keypersonnel. An organization scoring between 40%-70% requiresattention into some of its environment. The auditors shouldidentify the areas where reform is required. When anorganization scores less than 40% on the COT, there is timeto wait and see. It means the systems and procedures are inplace and merely enforcement action is required to preventcorruption5.

6. Audit ExecutionAs a first step in audit execution the auditors should writean audit program tailored to the objectives of theprocurement audit with a focus on anti-corruption. Theyshould embed the audit program with two types of issues: (a)general issues and (b) specific issues. The general issuesshould cover principles of good governance such astransparency, accountability, conflict of interest andprinciples of good management such as economy, efficiencyand effectiveness. The specific issues should cover theprocurement cycle as discussed in this paper. For each stagein the cycle, the auditors should keep the audit criteria in

5 For a practical illustration of Corruption Opportunity Test as appliedto procurement audit, see the present writer’s A Practitioner’s Guide to Corruption Auditing (2006).

view and write procedures for getting an assurance that themanagement adhered to the criteria. Writing a model auditprogram for procurement function will be a long drawnprocess and does not fall in the scope of this paper.However, the following discussion provides some pointsrelating to specific issues pertaining to procurement with afocus on anti-corruption. The auditors can suitably embedthese points in the audit program. Confirming the understanding

With the inventory of corruption opportunities developed atthe planning stage, and short-listed by applying COT in theform of Most Likely Areas of Corruption, the auditors shouldcommence the fieldwork for confirming their understanding ofthe short-listed opportunities for corruption throughlarger, systematically drawn unbiased samples. It wouldroutinely require discussions with the relevant staff andinterviews with the concerned officials. The auditorsshould verify if the controls claimed to be in place were infact operational in the organization and had been sothroughout the period under audit. The fieldwork may unravelareas of general consensus and also areas of disagreement.The auditors should carefully analyze these two types ofareas and focus, as a matter of priority, on those areasabout which there is a general perception of corruption. Client or public surveys

The nature of corruption audit requires the auditors tobreak away from their traditional mould and to adoptinnovative techniques. The traditional view that theauditors should remain restricted to the internal recordsand should not venture to collect information from outsidedoes not fit well into the concept of corruption auditing.The auditors should take a proactive approach and collectinformation from general public, users of governmentfacilities and clients of the audited organization, ifnecessary. For this purpose they should conduct surveys andcollect information from outside the client organization.Generally, a decision to conduct public survey should beconsidered if the organization is providing any service to

the general public, as it is likely to unravel corruptpractices if they were in vogue. Many people would like toraise their voice if they were not satisfied. At this stage,the auditors should develop necessary questionnaires, decideon the sample size, select areas to be covered and method tobe adopted. Employee surveys

Still another option in fieldwork is to conduct a survey oforganization’s employees. Such surveys are appropriate ifthe size of the organization is large and is spread out atdifferent locations. The design of the survey should keep inview that employees have a built-in tendency not to speakout against corrupt colleagues and management. Thequestionnaire should be couched in a language that providesrespondents opportunity for hinting at corruption withoutnaming 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 annualprocurement plan as it allows them to embark on exigencypurchases and ‘rush-buying’. These are avenues forcorruption and the auditors should question the reason whyannual procurement plan was not prepared in time. In somecases, such plans are prepared with considerable delay andin the intervening period, ad hoc buying continues,providing opportunities for corruption. Thus it is alsoimportant to determine when was the procurement planprepared and if it took longer than usual, what were thecauses. Defining needs

(a) Tender documents based on false calculations and assumptions

One of the corrupt practices is to manipulate the designdocuments in a manner that some options are ruled out. Forexample, the procurement officer can exaggerate the cost ofriver 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 roadsin a certain area is so bad that no road transportation ofgoods is possible at a reasonable cost and within areasonable time or the river transportation is not possible.Thus the only option left is air transport. The aboveassumptions may not be factual. The hidden motive could beawarding contract to a favorite air cargo company and toignore road or river transportation as options. The auditorsshould verify the basic assumptions in the procurement planbefore relying on them. (b) Falsification of needs The auditors need to be vigilant about determination ofneeds at the planning stage. Corrupt officials try to over-estimate the needs for justifying excessive purchases in thehope of getting larger commissions or kickbacks.Alternatively, they would like to understate the need sothat it can be easily approved. Subsequently the needs areexpanded through change orders or modifications or ex-post-facto approvals. The auditors need to examine the basis onwhich the need was justified, verifying assumptions andcalculations of the requirement.(c) Procuring new assets instead of repairing the old ones Repair and maintenance of old assets does not provide asfertile a ground for corruption as procurement of new assetbecause of the volume of funds involved. The auditors shouldreview files relating to replacement of assets to determineif the option to repair the existing assets was consideredon the basis of verifiable documented data. There could bespurious data to justify replacement over repair. (d) Exaggerated cost estimates One of the standard techniques of corruption is toexaggerate the cost estimates at the planning stage andcomplete the work with substantial savings. The executingmanagers try to claim efficiency and credit for economy. Infact, there had been wastages, which were hidden by theinitial exaggerated cost estimates. The executing managers

may have received kickbacks from the contractor besidesgiving him some undue favors and yet creating a surplus fromthe estimated budget. The auditors are often satisfied ifthere is cost saving. However, substantial savings overestimated costs could also be a red flag of corruption. Theauditors should carefully review the planning assumptionsand the basis of cost estimates.

(e) State-of-the-art purchases The management buys state-of-the-art equipment. It isconsidered better as compared to purchasing outdatedtechnology. However, this has a catch. If the new equipmentis not compatible with the existing one, it may be difficultto use it. Or, the staff may not know how to use the newequipment and there is no arrangement for training.Ultimately, more money is spent in modifying the existingequipment to make it compatible with the new purchase or thenew equipment remains unused for want of expertise6. (f) Unrealistic or fake feasibility studies A method of indulging in corruption is to arrange fake orunrealistic feasibility studies through consultants or in-house staff. The studies are either unusable or remainunused. The conclusions in the studies are either vague orimpractical. However, they are carried out to fulfill therequirement for feasibility studies and then overruled orset aside for going ahead with a pre-designed agenda. Theauditors should go deep into the whole exercise offeasibility studies and see how far they were genuineexercises and how were they utilized. Bidding

(a) Unusually short time for bidding Unusually short time for bidding presents an opportunityfor corruption. The procurement staff can oblige theirfavorite bidder (of course, by receiving bribe), who isalready in picture informally, denying sufficient time toother potential bidders for submitting their bids. While

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

reviewing tender documents, the auditors should look intothe time allowed for submission of tenders. (b) Extension in bidding deadline If the auditors find that one or a few selected biddershave been granted extensions in time to submit the bids,the likelihood of corruption exists. The management canargue in such cases that others did not ask for it. Suchexplanations are usually lame excuses. (c) Electronic submission of bids In case bids are to be submitted electronically, thereshould be robust controls on confidentiality of bids so thatinformation submitted by one bidder is not accessed by anunauthorized person, including those dealing with theprocurement assignment. The auditors should particularlytest these controls for effectiveness. Examples of suchcontrols are determination of levels of access rights,segregation of hard drives, allocation of secure passwords,and submission of files in Portable Document Format (PDFformat) that does not allow any alteration.

(d) Fake or limited publicity The records of the organization might say that theadvertisement for the tenders appeared in a certain numberof newspapers and magazines. In fact, either the figure maybe fake or the advertisement may have excluded a certainregion altogether or may have appeared in a manner thatcould easily go unnoticed. Other corrupt practices could beavoiding publicity altogether on grounds of state secrecy,defense needs, exclusivity of research, additionalrequirement under a previous contract, or experimentalpurchases. 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 onthe bid-opening day was very thin or that only one bidderwho attended was the one who got the contract. It could bethat the invitation for attending the bid opening sessionwas suppressed en route through collusion with the postal orcourier service or the invitations were issued so late thatthey did not reach all invitees on time. (f) Bid rigging Bid rigging takes place where the prospective bidders joinhands and submit bids in a manner that one of them gets theaward at a higher than market price by quoting the leastprice, while others conspire to quote higher prices. In thenext round, another one of the group gets the award byfollowing the same procedure. In this way, the cartelbenefits each other but the organization loses money throughhigher than market prices. Bid rigging per se does notinvolve corruption. However, it can involve corruption ifthe procurement officers also join hands, once they are ableto detect the practice and agree not to interrupt thepractice. Bid rigging is a complex phenomenon. The procurementofficials can detect it if they so do not join hands. There

are several methods. For example, the procurement officialsget market prices through an informal inquiry and if thedifference is significant, there is a possibility of bidrigging. They can check with some sister organization thatmay have procured the same products recently. They mayanalyze the pattern of bids in successive rounds and to seeif the known bidders are taking turns in different awards.If the procurement officer, despite suspicion of bid riggingdoes not take any action, there could be corruption on theirpart. If the auditors suspect bid rigging, they shouldexamine if the procurement agency took reasonable steps toforestall it. (g) Correspondence with bidders The audit procedures should include file review ofcorrespondence with bidders. The focus should be on anyinformation that may have been provided to one or a fewbidders to the exclusion of others. Bid evaluation

(a) Technical evaluation criteria may favor a particular bidder

The procurement agency may develop technical criteria tofavor a specific bidder. For example, past work with theorganization may carry a weight of 30-40 per cent, debarringthose who did not have previous experience with theorganization. The technical criteria can have suchsubjective factors as “environmental considerations” or“architectural design” with the intention of helping aparticular bidder. The auditors should examine the weightingsystem and discuss it with the management to ensure that itwas reasonable. (b) Local conditions in evaluation criteria Another loophole can be introduced in the name of specificeconomic conditions requiring preference for local bidders,or for protecting local environments, or for developingunder-privileged areas, etc. The auditors should examine howthese considerations were built into the technical criteria

and that they should have been disclosed in advance to allconcerned. (c) Corruption while remaining within the rules Another type of corruption is where the public officialsbehave within the framework of the rules. They break or bendno rule and a routine audit examination may not suspect anycorruption. However, there could be hidden corruption. Theprocurement rules are framed for erecting barriers to entry,facilitating qualification of a particular company. Forexample, the requirements of capital or the level ofliabilities, or the nature of technical experience requiredare defined in such a manner that some of the potentialcompetitors are unable to enter the bidding process. Theauditors need to review the bidding rules from this angle. Spurious lowest bidA method of collusion between the public officials andbidders is to award contract to the lowest bidder on thebasis of overall cost. But unit costs of some items in thebid are higher than others who did not get the contract.Subsequently, the items with the higher unit cost areordered over and over again, increasing the total quantityof such components several times the initial procurement.Normally, fresh tenders are not called if the cost is thesame as agreed in the existing contract. The contractorearns 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 lowestbid but also analyze the unit cost of items. In particular,this is important if the repeat orders involve those verycomponents where the unit costs were higher than those ofthe competitors. Besides, they should determine why thetotal quantity to be procured was not disclosed or plannedin the first instance. Uneconomical life cycle costThe purchase price of the equipment is lower but themaintenance, to be carried out by the vendor, is quiteexpensive and makes the whole deal uneconomical when

compared to other competitors. Therefore, the auditorsshould always look for life cycle costing and see how themanagement has handled the question of maintenance. Ideally,the purchase contract should have a provision formaintenance as well so that the bids contain these twoelements and it becomes possible to compare the life cyclecosts quoted by different bidders.

(d) Obvious high prices for common goods and services The auditors may notice that some common goods, likestationery, cleaning material, ink cartridges, crockery,water, etc, were procured at obviously high prices, despiteall formalities for open bidding. Auditors may like to checkprices of such goods on Internet or even from the openmarket. Such situations also raise concerns aboutcorruption. Similarly, prices may be obviouslydisproportionate with reference to inputs and outputs forvarious services. The auditors should examine such cases indepth. Contract award

(a) Large sole-source procurement The organization is making procurement from a single sourcefor over a long period, though it appears to have fulfilledall formalities of competitive bidding. The usual excuse isthat tenders were invited but no one except the sole biddershowed interest or in each case the same bidder was thelowest. Such situations have a catch. Either the requirementwas defined in such a manner that only one bidder couldcomply, or advertisement was not wide enough or there was animplicit collusion among bidders or the quantities requiredwere too low or too large for one bidder, etc. The auditorsshould demand information on the efforts made in marketresearch or for promoting competition. The procurementagency should have documentation to support the contentionthat the sole source procurement was the only option. (b) Totally unknown and new supplier The auditors may notice that an unknown new supplier appearson the scene. It could be a shell company, created by one ofthe 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 othersources. Prices of some components are higher than themarket 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 thesecompanies had quoted higher rates would be placed as amatter of course. The auditors should be alert to suchtotally unknown companies that appear on the scene. If theevaluation committee recommends a new bidder and it has alsonot checked the antecedents, the auditors should be alert tosuch selection. This is all the more imminent if theprocurement was done on the basis of single tender. (c) Significantly high or low prices The auditors should be alert to the possibility ofcorruption if the contract price is significantly higher orlower than the budgeted price (about 20 percent or more).The variation could be due to collusion of vendors inraising prices or poor quality or defalcation in quantity.It could also be a mechanism to get the contract at lowprices and then increase the quantities or issue changeorders at varying prices later on, thus compensating thecontractor for the bribes he paid. (d) Delay in signing the contract Abnormal delay in signing the contract after announcing thewinning bidder indicates likelihood of corruption. Thecontract awarding authority may, secretly, be negotiatingbribe with the winning bidder. The auditors should analyzethe time taken in signing contracts for a sample ofcontracts. (e) Very short standstill period ‘Standstill period’ refers to the time between notificationof decision to award a contract and the date when the actualcontract is signed. The standstill period allows theunsuccessful bidders protest the decision of the award. Anexceptionally short period or absence of any such periodlimits the opportunity for the competitors to protest such adecision and could involve corruption. Generally, a periodof 10-15 days is considered appropriate, depending upon thenature of procurement. (f) Corruption by breaking, bending or ignoring the rules

A type of corruption takes place when a public officialbreaks, bends or ignores a rule. For example, the rules ofprocurement may require that there would be no negotiationwith only one bidder. But the procurement officer engages inthat. Or, the rules may specify that the information of onebidder would not be passed on to another but there isevidence 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 intosmall ones, avoiding higher authorization on one hand andopen bidding on the other. The favorite contractors getsmall contracts and share the booty with the management. Ifthe auditors see such contracts, they should suspectcorruption. (h) Omission or dilution of certain clauses in the contract Sometimes the contract omits such administrative clauses asrelating to liquidated damages or performance bonds orpenalties for reduced quality or for missing the deadlines.Such omissions are not innocent oversights. There may becollusion between the contractor and the public officials.Alternatively, these clauses may be framed in a manner thatreduces the effect of penalties. When these clauses existappropriately, the project mangers may not initiate anyaction against the contractor. This should not be merelaziness or inefficiency; it is usually due to corruption. (i) Unresolved bid protests During file review, the auditors may notice unresolved bidprotests. A deeper review may indicate that the protestersraised these disputes justifiably but the management ignoredthem. The auditors, with the agreement of the management,may decide to interview the protesting bidders to make afirst hand assessment. Such cases indicate a situation ofcorruption and may require investigation. (j) Changes in standard contract template

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

(k) Changes as a result of negotiation The auditors should review results of negotiations with thewinning vendor after the tenders have been evaluated.Normally, the negotiations should not change the basiccharacter of the tender in terms of quality, quantity orother significant conditions such as after-sale service orstaff training or warranty period, etc. Any significantchange as a result of negotiation, usually, calls for freshtendering otherwise it should be construed as restrictingcompetition through backdoor. Contract administration

(a) Discounts and promotional products by the contractor The auditors should interview the contractors to find outtheir system of discounts to customers and then verify ifthe organization was availing them. Further probe mayestablish that some employees of the organization aresharing it with the contractors’ staff. Similarly, thecontractors may be distributing promotional gifts among theprocurement staff. These gifts may be of substantial value,like holiday trips abroad, dinners and music nights,expensive gifts on wedding ceremonies of the procurementstaff, 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 frequentextensions in time to a particular contractor. (c) Poor quality sub-contracting Where a contract provides for sub-contracting, it isimportant to ensure that the performance of the sub-contractor comes up to the standard visualized in the maincontract. The main contract should provide for thisassurance by the contractor. Where a contractor engages asub-contractor without a proper provision in the main

contract, it is an outright violation of the contract. Ifthe main contract does not guarantee performance of the sub-contractor or the contract management does not object toemployment of a sub-contractor, it is a clear case ofcollusion and possible corruption and should beinvestigated.Procurement management

(a) Rotation of procurement staff Opportunity for corruption exists if the auditors find thatprocurement staffs at certain desks have been there for along period. They are likely to develop friendships with thevendors over time. The auditors should be alert to suchsituation.(b) Response to complaints of corruption The auditors should review the status of complaints againstcorruption and the action taken by the management. Failureto take an action or a lukewarm attitude towards complaintsshould alert the auditors about risk of corruption.Anonymous complaints are, normally, not taken seriously.However, there should be some evidence that some elementaryinvestigation was done to ensure that the anonymouscomplaint was baseless. (c) Past audit recommendation Disregard of previous audit recommendations encouragescorruption. If the organization has no systematic follow-upof past audit recommendations, it gives a wrong message tothe corrupt officials: they can get away with anything. Thesituation requires auditors’ attention. They shouldaggressively follow up with the past audit recommendations.(d) Potential conflict of interest The auditors should get a list of key contractor personnelwith their background and experience. If the contractor isemploying former government servants, who were responsiblefor procurement and contract administration of similarcontracts, 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 forpossible compromises in quality, quantity and deliveryschedules through collusion with the present staff. Also,there could be evidence that these very officials handledthe present contract and provided some undue benefit to thecontractor.

7. Reporting Results of AuditGenerally accepted auditing standards require that theauditors report results of their work in the form of anaudit report. While the audit report on procurement wouldconsist of the findings and recommendations relating to theparticular entity under audit, the focus on anti-corruptionwould suggest that the auditors also make recommendationsfor preventing corruption. They should focus on the systemsand procedures that may be conducive to corruption or leavesome lacunae for manipulation by corrupt people. The mainguidance for developing recommendations is that the auditorsshould analyze deviations from the audit criteria and aim topersuade the management to get closer to it, since thatwould be in line with the generally accepted managementpractice. The auditors should discuss the draft report withthe management and seek their agreement in principle. Theobjective is to couch the recommendations in a manner thatis acceptable to the management. In the followingdiscussion, we shall give a sample of recommendations thatthe auditors can make while pursuing the objective of anti-corruption in procurement. These recommendations are onlyillustrative and the auditors would need to modify themaccording to the actual situation. Transparency

(a) While planning procurement, the organization may haveto contact some potential suppliers. The organizationshould clearly define the parameters within which suchcontacts can take place. It should also have theprocedure of recording details of the information sharedin these contacts. Such procedures enhance probity andtransparency in procurement.

(b) The organization should have a standard procedure thatrequires documentation of important decisions relatingto procurement, in particular if there is a departurefrom the generally accepted good practice.

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

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

(e) The procurement agency should post on its website awritten justification of any contract award, if it hasnot been given to the lowest bidder. This informationshould 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 shouldoffer to register the potential vendors for such e-mailalerts.

Governance

(a) The head of the procurement agency should be a seniorperson in status and known for integrity and honesty.The staff at the lower level should also be selectedwith strict regard for qualification, experience andspotless antecedents.

(b) The terms and conditions of service should debar thehead of procurement agency from seeking employment for aperiod of two-three years with any of the vendors of theorganization.

(c) The procurement staff should be rotated frequently toreduce the level of familiarity with the bidders in aspecific line.

(d) There should be more stringent ethical standards forpersons involved in procurement, such as requirement fordisclosure of assets even at lower levels or more strictcriteria for screening at time of recruitment, ortraining 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 receivingbribes and undue benefits. The auditors should carefullyanalyze laws, rules and procedures for identifying areas ofdiscretion and pointing out where it can be substituted withobjective criteria. Where discretion cannot be dispensedwith the auditors can make following recommendations forminimizing its misuse.

(a) The public entity should issue guidelines publiclyfor using discretion so that the clients know theframework within which public officials can usediscretion.

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

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

(d) There should be an institutionalized system ofpost-facto administrative reviews of the decisions madeby public officials.

Protection of whistleblowers

(a) The government should enact necessary law for effectiveprotection of whistleblowers, witnesses and experts whogive testimony against corrupt practices for encouraginghonest reporting of misconduct as well as discourageretaliation or interference in this reporting. The lawshould also be a deterrent against false and cooked-upreporting. The auditors should make recommendation forenacting the law if it does not exist.

(b) The organizations should establish hotlines and e-mailaccess for anyone who would like to inform about corruptbehavior of an employee or a third party dealing withthe government.

Monitoring and oversight

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

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

(c) The procurement agency should conduct training andawareness workshops for potential bidders, informingthem about the rules, procedures and mechanism to lodgea complaint if there is a failure. It will initiate acultural change.

Use of information technology: e-procurement

(a) The auditors should encourage e-procurement. E-Procurement is defined as automation of the procurementprocess by using technology. Besides other advantagessuch as speed and simplicity of ordering, visibility ofsupplier stock levels, accuracy of delivery times,reduction in order error rates, and elimination ofbureaucracy, it is more transparent than theconventional procurement process7. It reducesopportunities for corruption as it curtails the personalcontract of public employees with the suppliers. It ismore relevant in case of systems contract whereindividual user departments can place online orders withthe approved vendors at agreed prices without dealingwith the contactor. However, e-procurement can beeffective only if it comes along with efforts for

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.

capacity building through training of employees andissuance of guidelines and manuals.

(b) As a long term good management practice, theprocurement agency should set up an e-procurement portalthat provides information on all planned procurements.The portal should be accessible to potential vendors foruploading their catalogues. It could also be enhancedfor reverse auction. The recommendation would requiresignficant investment in technology. The auditors shoulddiscuss its practicability with the senior management.

Information on procurement

(a) The procurement agency should maintain information onall procurements such as requisition requests, optionsanalysis, mode of procurement, technical and financialevaluation, approval of contract, delivery bycontractors, inspection of goods and services, andvendor evaluation. As far as possible, all this shouldbe at one place.

(b) The procurement agency should collect information onprocurement done during a period for comparison withbudget and analysis of trends in various goods andservices. It can help identify any abnormal purchasesand need for better planning and budgeting, besides anypossibility of corruption and fraud.

(c) The procurement agency should have information aboutwho purchased what to ensure that the procurement staffhas the necessary skills and training in theirrespective fields.

(d) When a public entity operates at different locations,there is a risk that the employees of the same entity atdifferent locations enter into different arrangementsfor same or similar goods and services. For mitigatingthe risk, the public entity should collect anddisseminate information on prices paid for various goodsand services at different locations. The information canprovide basis for benchmarking prices. Where possible,information on prices and other terms and conditions forprocurement done in the private sector should also becollected for purpose of comparison.

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

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

Continuous auditing

There is a recent development in audit methodology thatemphasizes continuous auditing as the transactions aretaking place8. Traditionally, audit has been a post-factoexercise based on a sample of transactions. Despite allrefinements in the audit methodology, the risk of notdetecting an error or fraud remains. Technology has enabledthe auditors to check 100 percent transactions as the eventsare happening by getting access to the files of theexecutive on real-time basis. The basic documents such aswork orders, inspection reports, supplier’s invoices andvarious approvals are scanned into the computer of theexecutive. The auditors get an on-line, real-time, read-onlyaccess to these documents. They can audit the transactionsthrough various stages and can point out any error oromission while it is happening and before it gets too late.The auditors can recommend that the management install asystem of continuous auditing. Besides other advantages, itcan act as a deterrent to corruption. Procurement manuals

(a) The public entity should develop standard operatingprocedures (SOPs) for various stages of the procurementprocess. The SOPs should be part of the procurementmanual. The manuals should determine conditions forexigency purchases, sole source purchases and cashpurchases. There should be unambiguous limits ofauthority to be used at each level.

(b) The commonly used items, such as computer accessories,and stationery should be standardized for availingeconomies of scale and reducing possibility ofmaneuvering specifications with collusion of procurementstaff and vendors.

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

Human resource management of procurement staff

(a) Procurement agencies should develop a corps ofprofessionals for the procurement function. Theprocurement is a specialized technical function withneeds for training in techniques and code of conduct.The staff should have incentives for adhering to thecode. The procurement agencies should offer training tothe purchasing staff in rules, regulations and ethicalstandards. The staff should be aware of risks,techniques and methods deployed by corrupt people andthe mechanics to prevent corruption. The staff shouldalso be sensitized about detrimental effects ofcorruption9. The procurement staff should be trained intechnical specifications of various types of equipmentand services enabling them to remain free from thevendor capture.

(b) The organization should strictly enforce the system ofchecking antecedents of potential employees before theyare hired for procurement-related jobs. The screeningshould aim at getting reports from referees, previousemployers and other relevant sources on any pastmisconduct or history of fraud and corruption of thepotential employees.

(c) The procurement agency should undertake independentinternal targeted quality assurance reviews of itsprocurement activity for particular lines of procurementand for large contracts.

(d) The public entity should introduce a system ofperformance measurement of the procurement staff inlight of laws, rules and the contracts executed. Theperformance indicators should be defined in consultationwith the staff and should be used as benchmarks fortheir career progression.

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

(e) The procurement agency should undertake clientsatisfaction surveys at least once a year. The resultsof surveys should be fed back into the futureprocurement plans and practices.

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

Re-engineering of complicated procedures

The auditors should identify critical service delivery areasand develop a complete flow of the procedures and steps.They should then determine the optimum time required todeliver the service if the procedure is followed honestly.They should compare it with the “expectations” of thecitizens, determined through surveys and see if the optimumtime is a fair basis for delivery of the service. As asecond step, they should discuss with the management thepossibility of eliminating some of the steps and assess therisks involved if such a proposal is implemented. If theauditors are confident that such re-engineering ofprocedures would not involve a significant risk, they shouldconsider 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 aspart of the social responsibility, such as building aschool, a road, a water supply scheme or a gas supply line,etc. If the contract-awarding agency considers suchrequirement as essential, it should announce it at the timeof inviting tenders so that all competing firms can buildits cost in their quotation. Dealing with anyone firm onthese lines in a secret manner and then favoring it in thefinal contract-award on this basis would be a corruptpractice, though the procurement agency officials may not bedirect beneficiaries of this deal. Being part of anti-corruption network

The organization should become part of the anti-corruptionnetwork both nationally as well as internationally forreceiving and sharing information about vendors andemployees involved in corruption. The network could also bea good forum to exchange information, manuals, guidelinesand best practices on procurement. Cost audit of sole supplier

If for reasons of technical specifications, reliance has tobe placed on sole source, the procurement agency shouldconduct market surveys for quality and prices and insist oncost audit of the sole supplier before any follow-on orderis placed. Black or white lists

The procurement agency should have a mechanism in place forblacklisting corrupt firms. Alternatively, a ‘white list’ offirms eligible for bidding, based on past performance andhonest dealing is developed on the basis of a transparentcriterion.Price protection clause

The procurement agreement should have a price protectionclause that guarantees that the price and discounts offeredby the vendor would be equal to or more favorable than thoseoffered to any other customer, with a provision for theorganization to audit the records of the vendors forcompliance 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 toopen their books to the organization’s auditors in case of small buys.

Cost-plus contracts

(a) In case of cost-plus contracts, the contractor shoulddisclose the profile of key personnel in his or herorganization to forestall any potential conflict ofinterest.

(b) In case of cost-plus contracts, the main contractorshould disclose the nature of relationship withsubcontractors to prove that there are no organizationalinter-linkages for bidding up costs.

8. Concluding RemarksProcurement in public entities could consist of simplestraightforward purchase of standardized products atcompetitive prices from open market. It could also becomplex contracts for delivery of goods and services over anextended period of time and at diverse locations. Thecomplex procurement assignments require proper planning. Themore complex a procurement assignment the greater is therisk of corruption. Audit of procurement with an anti-corruption focus presents the auditors with formidablechallenge, as they would be expected to report oncorruption, which has a little documented evidence. For thisreason, the auditors should be quite clear about the factthat they can play a significant role in prevention ofcorruption and have only a limited role in detection ofcorruption, although they can provide important informationto anti-corruption agencies for investigation and detectionof corruption.

The auditors would need to tailor their approach andmethodology according to the procurement assignmentsincluded in their sample. The paper has attempted to givegeneralized guidance to auditors for auditing procurementwith an anti-corruption focus. The paper takes the auditorsalong, step-by-step, through the familiar route of planning-executing-reporting of audit. While doing so, the papersynthesizes comprehensive audit criteria for procurementaudit with anti-corruption focus. As part of the riskassessment, the auditors should identify corruptionopportunity through a set of corruption indicators inprocurement proposed in the paper. The risk assessment takesa further step by applying Corruption Opportunity Test fordetermining areas of most likely corruption. The papersuggests a set of over forty areas for review during auditexecution. The paper proposes a number of recommendationsthat the auditors can include in the audit report forpreventing corruption. Need not be said that the generalizedapproach suggested in the paper cannot cover all situationsin practice. The auditors would need to exercise theirjudgment to tailor the methodology in this paper to theactual situation at hand.

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