Red flags during contract management

The red flags to watch for during the contract management stage of procurement

This information identifies the red flags of procurement fraud during the contract management process. A red flag will not always mean there is an issue, it just alerts you to something you may need to investigate further.

Controls to mitigate the risk of fraud in your agency, have also been listed. They offer strategies and information after each stage.

You can refer to Preventing procurement fraud for more information about how to practice due dilligence and reporting procurement fraud and corruption.

Contract management red flags

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The following situations offer examples of red flags to be aware of during the contract management stage of your procurement:

  • A contractor invoices for work but there are no/inadequate checks that the work has been done to required standards before paying the invoice.
  • Costs/margins look unreasonable or are not clear in the context of risk/nature of contract and contractor performance.
  • Design of contract leaves it vulnerable to manipulation.
  • Internal audit or the audit committee has raised concerns about a contract, eg its award or how it is managed.
  • Evidence of underperformance through published data, user feedback or whistle-blowing, client concerns, internal audit, audit committee or the media. A contractor is performing below expectations, but no penalties have been imposed.
  • Client or contractor reluctant to meet or talk about contract.
  • Contract is awarded on the basis of an unrealistically low bid which is then made up for by contract variations, duplicate invoices, sub-standard delivery etc.
  • Unspecified items on invoices and invoice prices/amounts do not match contract.

Controls

The following controls can be used by your agency to mitigate the red flags listed above:

  • Effective contract management and monitoring
  • Internal audit review of contracts including checking goods/services have been received
  • Proactive monitoring, such as spend analysis
  • Setting of appropriate authorisation limits
  • Segregation of duties
  • Effective budget monitoring

Source reference: https://www.audit-scotland.gov.uk/uploads/docs/um/fraud_red_flags_procu…

Payment stage red flags

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The following situations offer examples of red flags to be aware of during the payment stage of your procurement:

  • The same person has responsibility for both signing off and paying invoices, or the same person who approves expenses also counter-signs them. 
  • Irregular payments or gifts given to staff.
  • Increasing amounts paid in expenses or large payment(s) paid to an individual. 
  • Transactions carried out at an odd time, odd frequency, unusual amount or to unexpected recipients.
  • Internal controls which are not enforced or are compromised through intervention by more senior colleagues.
  • Discrepancies in accounting records and unexplained items on reconciliations.
  • Bank reconciliations are not up-to-date.
  • GST charged on invoices but no Australian Business Number.
  • Poor budget monitoring.
  • Missing documents/only photocopied documents available.
  • Excessive/spurious voids or credits.
  • Common names or addresses of payees or customers.
  • Unusual discrepancies between the client’s records and confirmation replies.
  • Missing inventory or physical assets which cannot be adequately explained.
  • Evidence of alterations on documents, such as backdating signatures.
  • Duplicate or inflated invoices.
  • Employees unwilling to share duties, take leave or may have a lifestyle above their apparent means.
  • Unusually high payments in a certain cost centre.
  • A large number of small payments to one supplier.
  • Receiving and paying for poor quality goods/services.

Controls

The following controls can be used by your agency to mitigate the red flags listed above:

  • Whistle-blowing policy and open culture
  • Strong segregation of duties and duplicate payment controls
  • Active management of conflicts of interests and Gift and Hospitality Registers
  • Internal review of controls
  • A ‘zero tolerance of fraud’ message from the top of the organisation

Source reference: https://www.audit-scotland.gov.uk/uploads/docs/um/fraud_red_flags_procu…

Page reviewed 11 November 2020