5 Procurement risks that need to be made visible

Economic uncertainty and slow growth in many sectors of the South African economy has focused senior management’s attention on improving efficiencies in their businesses. Measuring risk is integral to managing how efficiently organisations expend their money: ‘risk’ covers the management of internal processes around expenditure and the behaviour of management and staff, Alan Low of Purchasing Index (PI) tells SmartProcurement.

With growth in Europe at all-time lows and signs that demand for imports in China and India is slowing, the value of South African exports is likely to fall. Similarly, domestic demand is still weak and, therefore, businesses are turning their attention to the management of their expenditure to improve profits; including management of the risk of “inefficient expenditure.”

At one end of the scale this means managing innocent behaviour resulting in inefficient expenditure and at the other it includes proactively detecting areas of fraud and corruption.

Local legislation (The Prevention & Combating of Corrupt Activities Act – 2004) makes the failure to report corruption exceeding R100 000 in value a criminal act; and while admitting that your company has been defrauded is never good publicity, coming to an arrangement with anyone who has defrauded your company could result in senior managers being criminally charged!

The recently enacted UK legislation (UK Bribery Act – 2011) has jurisdiction outside that country’s borders and provides for prosecutions to be brought before UK courts where non-UK companies that do business in the UK (i.e. supplying UK customers, etc.) fail to prevent bribery. A company can invoke in its defence that it ‘had in place adequate procedures designed to prevent persons associated (with the company) from undertaking such conduct’.

Whilst many organisations have such procedures in place and investigate corruption when it is uncovered, most have few or no systems that can detect areas where it has occurred or is likely to occur.

Therefore, for legislative and commercial reasons PI is working with its clients to build relevant, proactive analysis services to manage and measure risk and to uncover areas where spend may be fraudulent. These include the mundane to the exotic, but here a 5 areas that need attention:

  • Uncovering staff who are also suppliers to an organization.
  • Reviewing undisclosed family interests in suppliers.
  • Monitoring non-contract and unapproved spend.
  • Highlighting processes that may allow staff to make unauthorised spend.
  • Reviewing delegated spending limits and spend patterns.

Furthermore, using probability analysis and other algorithms can highlight areas for further investigation.

PI’s experience is that monitoring systems often change organisational behaviour. Our aim is to assist organisations to improve corporate governance and help them prevent inefficient expenditure of company funds before it happens.

For more information contact Alan Low at Alan@pibenchmark.co.za

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