SEPARATION OF DUTIES AND CONFLICT OF INTEREST

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, 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 risk and will require a compensating control to protect the organization.

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 risk.

Conflict of Interest

The conflict-of-interest principle is 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 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 them 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 procurement 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 good 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.

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.