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Ensure adequate procurement internal controls

Opinion & Analysis
Internal controls for a procurement function must be an integral part of the organisation’s risk management strategy. Many procurement functions internal controls are an after-thought. Most of them are a reaction to a problem when an institution will be trying to plug holes identified after a procurement fraud.

Internal controls for a procurement function must be an integral part of the organisation’s risk management strategy. Many procurement functions internal controls are an after-thought. Most of them are a reaction to a problem when an institution will be trying to plug holes identified after a procurement fraud.

Column by Nyasha Chizu

Procurement control systems form part of an effective financial control system. Although procurement activities have financial implications, financial control systems on their own are not adequate to provide effective internal procurement controls. The function is technical and highly specialised and as such requires specialised control systems.

Procurement internal controls take a cue from financial control systems. The controls must ensure structures, staff and transactions are adequate. In procurement, the organisational structure must provide for a procurement cadre having specific responsibilities and delegated tasks related to procurement.

Most procurement activities are delegated to other functions in all sectors. The activity is usually subordinated to finance and administration department.

This inevitably dilutes specialisation at the detriment of efficiency and effectiveness in procurement.

The structure must provide for adequate segregation of duties for each transaction. Personnel responsible for need identification must be separate from those who authorise purchase requisitions.

Staff responsible for sourcing quotations and awarding orders should be different from staff that receive the goods and certify invoices for payment. Staff responsible for certification of invoices must be separate from staff that release payments for supplies.

Accounting internal controls require that suitable people are recruited for each job and appropriate training is provided for that job. The same is required for procurement activities. Suitable people must be recruited for procurement job. People with procurement related qualifications must hold procurement jobs as is the practice in other professions.

Supervision and oversight of work of other individuals handling technical activities must be done by competent people. Procurement supervisors must have procurement qualification or training for them to be effective. This will ensure effective control of procurement activities.

According to internal accounting controls, transactions must ensure physical protection of assets against theft and unauthorised access and use. In procurement, the asset is cash and the internal controls must ensure that there is adequate physical protection of the cash in procurement transactions.

Sourcing methods must provide for adequate comfort that the opportunity cost of the cash outlay is equivalent to the purchase. This is critical since most procurement fraud occurs when the transaction has been appropriately authorised.

Internal controls in procurement must ensure that there are mechanisms to verify the costs the organisation is paying for goods and services against what the market is offering, or organisations in similar industry are paying, so as to ensure that the organisation remains viable.

Incorporating benchmarking techniques in the internal controls will ensure that transactions do not proceed until an individual with relevant technical skills has given approval and the approval is supposed to be in writing. Procurement internal controls are necessary to minimise business risk associated with sourcing and payments.

This goes a long way to protect shareholder’s investments, safeguard assets and ensure that all transactions are compliant with the laws and regulations of a company and the country.

  • Nyasha Chizu is a fellow of the Chartered Institute of Purchasing and Supply writing in his personal capacity. Feedback: [email protected]