by Scott Moritz
Managing Director – Leader, Protiviti’s Fraud Risk Management Practice
In recognition of the 25th anniversary of the Association of Certified Fraud Examiners (ACFE) and International Fraud Awareness Week, Protiviti, whose practitioners include more than 100 members of the ACFE, is releasing a series of tips on fraud awareness to help raise awareness of the various ways that fraud can affect an organization and the proactive steps organizations can take to better position themselves in the ongoing fight against fraud.
One way to gain some assurance that you are getting the best price and that your bidding process is free from corruption is to implement a system of competitive bidding. The flaw in that thinking is that most competitive bidding programs assume that employees who are administering the bidding process have your company’s best interests in mind.
Unfortunately, companies are microcosms of society and a small number of your employees may see nothing wrong in committing crimes, large and small. For example, a common scheme that undermines the efficacy of any competitive bidding process is when someone involved in its administration elicits or agrees to accept a bribe or kickback that is often a percentage of the value of the contract award.
There are several steps organizations can take to prevent corruption from undermining the bid process. Performing background investigations of prospective bidders or those that have been shortlisted can provide insight into their character, integrity and historical conduct, including whether they have previously been involved in any scandals, whether they have ever been debarred from a bidding process, and whether they have any family members or close associates working at your company. The premise being, companies and individuals who have done things wrong in the past have a higher likelihood of doing them again.
By identifying previously undisclosed conflicts of interest in the course of a background investigation, you will be in a better position to implement ad hoc controls by removing any insider from the bid process who has been identified as having a potential conflict of interest.
Having certain controls over the bid process and taking steps to ensure they are being followed are critically important. One vital control is the establishment of a “quiet period,” which is a period of time during which there can be no contact with the company on the part of the bidders except with the designated point of contact who is administering it.
Another important control relates to the segregation of duties. The person administering the bid process should be independent from the project team. In larger organizations, bids are managed by someone in procurement. However, it is the project team that has the best understanding of the company’s requirements. This team must define the bid requirements and evaluate the bids once they are submitted.
Organizations also should establish some form of independent oversight to evaluate the project team’s evaluation of the bidders and its rankings in comparison to the bids themselves. Those performing this oversight should look for inconsistencies across the team as well as other information that does not reconcile with either the established requirements or the bids submitted.
Bid processes often have one or more rounds during which bidders are afforded an opportunity to lower their bids. Significant, unexpected drops in price or revised bids that come in just below the other bidders sometimes can be an indication that the low bidder may have inside information about the other bids. Under these scenarios, the individuals evaluating the revised bids may exhibit behaviors, in either their write-up or verbal advocacy in favor of one bidder over another, that could suggest some form of bias or favoritism, indicating the process has been tainted.
Another important control is informing all of the parties of the controls: bidders, bid evaluators, procurement and other involved parties. This should be communicated in a varied and consistent way, including in requests for proposal, written acceptance of the rules of engagement from each bidder, and training of all involved parties so that there is a clear understanding that the company expects the bid process to be clean.
Organizations also should audit the bid process after the fact. This may not prevent fraud from happening before a bid has been awarded, but it can provide insights into ways that the competitive bid process may have been circumvented that weren’t anticipated. This will allow you to further refine the process and take actions against those who were identified as having circumvented the process.
In addition, audits should examine whether there was inappropriate contact between anyone in the company and any bidder during, before or after the quiet period. Socializing with bidders, correspondence via email (personal or business), text messages, phone calls, or in-person meetings or meals all could be an indication that those violations of your bid policies may be undermining the efficacy of your competitive selection process.
Fraud occurs where the money is. Competitive bids are typically limited to large, complex, long-term and high value commercial contracts. Those submitting the bids have strong economic incentives to win and often those incentives lead to corrupt behavior that extends beyond the confines of their organization and into yours.