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Purchasing and Supply: How to conduct a ‘value for money’ procurement audit

Personal Finance
Compliance audit in procurement verifies if procedures were circumvented, if the record is complete and accurate, and if there is forgery or alteration of documents.

Compliance audit in procurement verifies if procedures were circumvented, if the record is complete and accurate, and if there is forgery or alteration of documents.

Report By Nyasha Chizu

The challenge is that procurement fraud might occur when all procedures were followed and, therefore, a procurement compliance audit alone is not enough evidence of a professional procurement process. A value-for-money audit is, therefore, necessary.

The economic principle of opportunity cost is very critical in assessing the efficiency of procurement processes. The value derived in a procurement process must reflect the value of the capital outlay.

There must be a close relationship between what was paid for in quantity and quality with what has been acquired.

Suppliers may induce buyers with bribes and accept higher prices and inferior quality. Suppliers may collude to achieve higher prices. They can also form cartels and promote price rigging.

An auditor may use the baseline as a basis for ascertaining if the value of the purchase complies with the opportunity cost principle. Baseline assessment involves the checking of the last price offered against the new price.

If item X in a certain quantity was bought at price Y at a specific date, how much did the organisation pay for this time around?

It is important to note that baseline price assessment will not yield results if the baseline is faulty.

A faulty baseline arises if the last price was not economic, that is, the last purchase was not competitive. Secondly, in the presence of collusive bidding and supplier cartels, it is difficult to expose any procurement anomaly using the baseline survey.

In order to assess whether purchases are providing the organisation with value for money, assessment of the market going prices is necessary.

Market price survey is a study of what the market is offering or what your competition is paying for the same product. Care must be taken to ensure apples are compared with apples and oranges with oranges.

An understanding of specifications is, therefore, critical in such an assessment.

For market going prices to have more meaning, one needs to understand the organisation being assessed in terms of payment systems.

Delaying payments attracts a penalty in the pricing structures. Good debtors pay less than bad debtors. Prices offered to good debtors on account do not factor in interest rate charges and costs of debt recovery that are synonymous with bad debtors.

A value-for-money audit is capable to verify if the extra charge is in line with prevailing interest rates to ascertain the prices that are paid by an organisation that struggles to settle invoices.

A value-for-money audit is not limited to the assessment of prices alone. Over-specifying and under-specifying can cost an organisation. Specifications must be clear and comprehensive based on SMART (specific, measurable, achievable, realistic, and time bound) criteria.

Value engineering and value analysis is critical in a value-for- money procurement audit. Some organisations insist that all specifications are reviewed and are signed off by the internal customer and approved by a supervisor.

This is meant to ensure that appropriate specifications are selected, taking into account the risks, value and the nature of the contract.

The review also ensures that specifications are appropriately worded to remove ambiguity and are in line with identified requirements.

Value-for-money audits can also be conducted pre-contract or post contract or on a continuous basis. Such services are technical and are offered by procurement auditors.

Nyasha Chizu is a Fellow of CIPS and the CIPS Zimbabwe branch chairman writing in his personal capacity. Feedback: [email protected]