… Continued from last week
Separation of duties:
A good procurement policy should contain clear guidelines for Separation (Segregation) of duties. A simple way to do this will be to have a matrix that describes the steps in the Procurement process, and the responsible authority for that process. For example, the authority or person who makes the requisition should not be the same person who approves the order. In case the reason for this is lost on you, please note that if the same person can raise a request, and approve the purchase, it exposes the company to significant risk. This means that certain purchases can be initiated and executed within one role! There are exceptions to this of course, but my message is clear. Any auditor worth his salt will flag such a process as a grave risk, and will insist that you develop a compensating control to protect the organization. An example of such could be the requirement that another senior member of the organization signs off on that transaction before an award is done, or before payment is made.
The separation of duties element is easily missed by most organizations because of limitations in staffing, or because the CEO always signs off on significant purchases. This is an accident waiting to happen however, and must be considered to protect the company from a major fraud. If your organization is a small one and you feel ‘safe’ because your boss always signs off on everything, by reading this article, you have become enlightened and you should go back with this knowledge, and propose changes. Your organization will reward you for it.
Conflict of interest
The conflict of interest principle is fairly well understood in the private and public sectors because it applies in many other areas of work outside procurement. It is in essence the existence of any factor or factors that can influence the process under consideration. A conflict of interest declaration with appropriate approvals MUST be signed off by parties involved in any aspect of the procurement process – from requisition to approval, goods receipt, and vendor payment. Any of these roles can be conflicted in the process, and make decisions that benefit individuals instead of the company. While it is true that the HR department usually requests an annual sign off of a company-wide conflict of interest declaration, the procurement organization should follow up with a transaction-based declaration. This declaration will cover for individuals within the process who have ‘conflicts’ and wish to announce them upfront so that critical parts of the procurement process will not be assigned to them.
Examples of conflicts of interests in the procurement process:
A ‘Requisitioner’ may indicate preference for a single source transaction because of close ties to that vendor. A buyer may own shares in specific companies that constantly bid for business. A purchase order approver may accelerate certain POs because of promises of settlement. A goods receiver at the warehouse may overlook defects and shortages in deliveries if he is assured of some kind of ‘reward’. An accounts payable staff may provide justification for expedited payment to a vendor with whom he/she is related.
The transaction-based Conflict of Interest Declaration may not avert these fraudulent activities out rightly, but it gives the organization some cover when such activities are reported and exposed. Now someone will ask me what the purpose of this document is, when some individuals with conflicts sign them and sometimes get away with it. Well, when such conflicts are detected and reported, such documents serve as evidence. Secondly, what if conflicts develop in the course of the transaction, or what if you do not know that a relationship is a conflict of interest? Declare it when you know it, and when you’re unsure, ask questions. It’s better to avoid the consequences of not doing so.
Hold yourself to a higher standard
It has been my experience that working for well established multinationals exposes you to the best practices and ways of working, mainly because they have access to up to date knowledge and resources. Smaller organizations struggle with setting up best in class structures in this area because they are under a different kind of pressure (growth and survival), and may not have to defend their numbers to the stock exchange or shareholders. The tendency is for procurement people in such organizations to relax and leave issues of policy to others. If you expect to grow in your career however, you must understand the basics of policy application, and procurement procedure. You must take the initiative to set one up, where there is none, and to update the existing ones in line with best practice.
These sections of a procurement policy provide an excellent foundation for the rest of the content, and will be a solid addition to your procedures, if you don’t already have them. In subsequent articles, I will discuss details of the procurement process, and Key Performance Indicators for the procurement organization.
Harold Nwariaku M.Sc, FCIPS
Harold Nwariaku, is a fellow of the prestigious Chartered Institute of Procurement and Supply, CIPS. He is the Principal Consultant at Harold &Co, a Procurement/Supply Chain Consulting firm.