Procurement and the role of ethics

SINGAPORE - Irregularities over procurement have drawn widespread public attention in the last two years following the reporting of numerous procurement irregularities and lapses in the public sector by the Auditor-General's Office (AGO) in its annual reports.

In its 2013 report, the AGO continued to find significant lapses in the tender evaluation process. The government responded to the AGO report by promising to tighten procurement procedures and controls. However, this step may not be sufficient.

In a worrying trend, most of the recent procurement cases reported involved key senior management. Despite being expected to play an important role in ensuring that the systems and controls are in place over procurement decisions, they had flouted or circumvented them. In the most recent reported case, an assistant director at the Corrupt Practices Investigation Bureau (CPIB) was charged with misappropriating $1.76 million meant primarily for the purchase of goods and services for his department. This indicates the need to also inculcate a high sense of ethics and to re-examine the role of procurement.

While the recent spate of procurement lapses appears to have involved government officers, we need to remind ourselves that the tendency of human nature to take unethical actions is not confined to the public sector. Many companies in the private sector also experienced procurement issues, albeit different in nature. For example, Sinotel, a telecommunications company listed on the Singapore Exchange, reported unauthorised purchases made by employees in 2012. The fraudulent activities reportedly cost the company about $21 million.

For many, such incidents serve as costly reminders that organisations need to re-look at procedures and controls within the procurement function. Indeed, to manage the behaviour of procurement officers, many organisations have put in extensive effort to design intricate rules and procedures that staff should comply with. Yet, we learn from past case studies that these are often insufficient. As apparent from the AGO reports, procurement lapses are rarely attributable to a lack of systems and controls within organisations.

In fact, many lapses resulted when procurement officers tried to comply with or circumvent the rules by "avoiding" other rules or retrospectively getting approvals only when goods and services have been delivered. For example, purchasing orders had been split into smaller ones to circumvent approvals. These are wilful actions undertaken by staff, highlighting possible ethical issues. It is clear that the issue runs deeper than flaws in the process.

While the majority of such lapses in procurement did not involve fraud, the frequency of these issues highlights the need to reconsider strengthening the ethical values and culture within organisations. Cultivating the right values will complement the rules to ensure that procurement issues can be mitigated, if not avoided.

Aligning the interests of employees with those of an organisation, however, is often a difficult task. Despite the popular and idealistic notion that employees will seek to maximise value for the organisation, self-interest often prevails, especially in difficult economic times. Entrenching the right values will help improve management decisions to create better value for organisations.

They need to act more responsibly to evaluate procurement decisions.

Exercising scepticism

For example, the 2012 and 2013 AGO reports criticised the approving authorities for not evaluating tenders properly, as well as not exercising sufficient scepticism during the evaluation process. Those with the authority to grant approvals should be constantly reminded of their role to go beyond evaluating procurement requests for compliance. They need to ascertain whether such decisions are in the best interests of the organisation.

That said, it is important that businesses do not become obsessed with a narrow focus on controls and rules. They should be concerned not only with the loss of shareholder value and avoiding them when procurement lapses occur. Management would do well to also consider procurement as a value-creation function. Procurement may not be the primary function through which an organisation creates value. Yet the process of procuring materials and services is often the first step in generating the value that shareholders seek.

The management concept of value creation has existed for many decades. It goes beyond maximising revenue and cost management. For example, the human resource department seeks to employ the best employee with the most appropriate remuneration package to generate value for the organisation. Similarly, the procurement department seeks to generate value for organisations by obtaining the best possible materials at the lowest cost.

Managers in organisations should be encouraged to adopt a positive mindset about the role of procurement. Rules and procedures should not only focus on deterring possible fraud and losses. They also function as guidelines in creating value for the organisation. Employees need to be reminded and educated about how their activities help to create value for the organisation. The mindset that rules are "obstacles" which inconvenience business processes should be vanquished.

Procurement officers should understand that these rules help the organisation make better decisions in generating value. For example, the need to seek higher authority for approving a higher-value purchase order goes beyond ensuring proper documentation and adherence to rules. It is also to ensure that more experienced staff members will help the organisation make the best possible business decision.

Recognising that many people need help to manage ethical dilemmas in the course of their work, Lee Fook Chiew, chief executive officer of the Institute of Singapore Chartered Accountants (ISCA), said that "to help professionals learn about making appropriate ethical decisions, the institute organises many ethics courses to help educate and bring greater awareness of the value of ethical conduct".

He added that while rules and procedures lay the foundations for greater operational efficiency in organisations, values and ethics are also necessary to ensure that we "do the right things the right way".

They can help create value for businesses by facilitating decisions which bring about sustainable and ethical growth for the long-term. Mr Lee pointed out that educating employees on the value of ethics is critical to all organisations in mitigating unethical conduct, regardless of profession.

Businesses, especially those without the expertise, can seek professional advice to evaluate and improve their procurement practices. The real value of using such services lies not only in enhancing compliance and deterring or detecting fraud, but in improving the efficiency and effectiveness of procurement rules.

Collective effort

Improvements in the rules can also bring about greater productivity when better documentation and checks result in fewer discrepancies and over-payments over contracts and purchases.

Mr Lee suggests that businesses also consider turning to small and medium- sized accounting practitioners (SMPs) for matters beyond financial accounting and reporting, such as advisory help to enhance procurement procedures. He believes that SMPs can function as enablers for companies to bring about rigorous procurement processes, including greater productivity in the processes.

Value creation stems from the collective effort of all the stakeholders within an organisation. Senior management, such as CEOs and CFOs (chief financial officers), should re-examine the role of procurement using the value creation lens. Procurement staff can participate in the value-creation process by helping to obtain the required materials and services at the best possible value.

Rules and procedures are necessary, if not critical, to minimise irregularities and lapses in procurement. Ineffective and inefficient rules and procedures, however, can destroy value. Beyond designing rules and procedures, appropriate values and ethics should also be ingrained within the organisation. With most organisations facing increasing challenges in the form of higher business costs, it is important that businesses leverage on the procurement function to create sustainable value.

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