Conflict of interest issues in procurement

30 September 2020

Steve Bennett, Manager, Forensic Services |

There are many organisational decisions that can be impacted by conflicts of interest (COI). Recruitment and procurement are two obvious areas. So, what should decision makers consider when assessing whether the influence, or perceived influence, of their relationships impacts the procurement process? Here are the key things to keep in mind.

Procurement in the context of local government

Broadly speaking, procurement is the action of obtaining or purchasing something. In the context of local government, it is the action of carrying out works and/or procuring goods and services to support the delivery of frontline services for constituents.

Having completed dozens of investigations into COI allegations for local government (and state government agencies) across Queensland, BDO’s Forensic Services team have encountered many circumstances where relationships have influenced, or have been perceived to have influenced a procurement decision.

A large council can spend $750 million annually on procurement, so it is crucial that there are robust, documented guidelines in place to ensure an ethically principled, fair outcome.

When relationships are involved, procurement COIs can become a bit of a minefield to navigate. The smaller the local government area, the larger this problem can become, because the odds of those involved in the process knowing, or even being related to each other, increases dramatically in smaller populations.

The legislation governing the way Queensland councils operate (except Brisbane City Council) - the Local Government Act 2009 and also the Code of Conduct for the Queensland Public Service - applies to all councils, regardless of size. There is no allowances for the inherent difficulty with COIs in smaller communities.

BDO’s Forensic Services team have conducted investigations into the actions of elected officials in communities with populations of less than 1,000 people. In one instance, the Mayor of such a council (a part-time role) was also the owner and operator of three prominent local businesses, all of which provided services to council. There were several COI issues involved when council debated whether to award work to these businesses, however little competition existed in the area.

In larger councils, the typical scenario usually involves a council employee having a real or perceived COI, because of their involvement in the decision-making process, such as responsibility for allocating the expenditure of council funds to particular goods or services. If the successful supplier is a person or organisation connected to the employee in some way, the validity of the procurement process could be brought into question if the COI is not declared and appropriately dealt with.

Dealing with a COI

As is the case with recruitment processes, having a COI in procurement processes is not necessarily a problem if it is declared and dealt with correctly. BDO’s Forensic Services team have observed a common view amongst council employees and some councillors that just having a COI in the first instance is somehow a type of wrongdoing, which is not the case. Where it becomes an issue is where it is not recognised and declared, or worse, it is ignored or covered up.

Let us consider a case study

The importance of a COI declaration is highlighted in this case study, based on an investigation a member of BDO’s team carried out on behalf of a small regional council.

Council received a complaint from one of its suppliers, Mr Brown of ABC Earthmoving. Mr Brown alleged the procurement process for a short-term earthmoving contract with council was unfair and the council officer involved, Mr Talbot, had a COI.

ABC Earthmoving was on a panel, along with several other contractors, to supply earthmoving plant, equipment and services to council for short-term projects. Work was offered to the panel members on a job-by-job basis and was dependent on the suppliers submitting a tender satisfying a number of stringent council requirements.

Mr Brown was unsuccessful in tendering for a particular job and when he requested feedback as to why, he was told the decision was based on price alone. Mr Brown felt this was odd because he had worked with council several times previously and his price had remained unchanged for the previous 18 months.

As part of the feedback, Mr Brown was provided with the name of the successful supplier, Smith’s Earthmoving.

Mr Brown alleged that, unlike his firm, Smith’s Earthmoving were not based in the region, so would not be considered a “local supplier” in the procurement process. Local suppliers earned extra weighting in council’s assessments and hence were more likely to win work. Mr Brown therefore found it strange that ABC Earthmoving lost the contract to them.

Mr Brown claimed there was a ‘familial relationship’ between Smith’s Earthmoving and Mr Talbot, which had influenced Mr Talbot’s decision to award the work to Smith’s Earthmoving.

An extensive investigation found the following:

  • According to council documentation, the tender submitted by Smith’s Earthmoving did not include the required supplementary documentation and therefore should automatically have been assessed as non-conforming and should not have progressed further
  • If local business weightings had been applied as per council policy, Smith’s Earthmoving would not have been the successful supplier
  • The Director of Smith’s Earthmoving was Mr Talbot’s nephew. Although they were not close family members, Mr Talbot had previously declared this relationship to council. However, Mr Talbot had been a council employee for more than twenty years and Smith’s Earthmoving had been a council supplier for at least five years. Despite this, the declaration was only made one month prior to the tender process in question
  • Regardless of the declaration, Mr Talbot did not remove himself from the process of assessing the tenders and was responsible for making the decision to award the work to Smith’s Earthmoving
  • Mr Talbot owned a rental property in the region. This property had been leased to Smith’s Earthmoving for the past two years and was used by its employees to stay in temporarily, when working in the region. Council were previously unaware of this.

Seemingly, the above evidence was fairly damning. However, the investigation also found mitigating circumstances:

  • Although he was a long-term council employee, Mr Talbot had only been promoted to the procurement assessment role some six months prior to these events. He had no prior experience in this role and did not receive training in the role from council
  • Mr Talbot was open and frank about his relationship with Smith’s Earthmoving and the investigation found that it was well known within council
  • Council were extremely short-staffed at the time of these events due to a series of retirements from key positions. One of the vacant roles was Mr Talbot’s ‘one-up’ line manager, so Mr Talbot had very little support in his new role and no one he could have deferred to had he removed himself from the decision-making process
  • The job in question was unexpected and urgent. As a result, there was a short lead time and Mr Talbot and his ‘two-up’ line manager had both genuinely attempted to seek advice on the tenders submitted at the ‘eleventh hour’, prior to the decision being made, but were unable to speak to anyone in council that could assist with their queries.

Key lessons

This case study perfectly illustrates several of the points made earlier. Particularly the issue of a COI being declared, but not handled appropriately from the point of declaration onwards. Mr Talbot clearly had a COI that he declared to council, however he remained the decision-maker for the procurement process, awarding work to a family member. This was clearly a COI and was inappropriate. The correct course of action would have been to remove himself from the process entirely.

Even if it had transpired that the tender submitted by Smith’s Earthmoving had complied with all of council’s procurement requirements, the decision to award them the work would still have been tainted by Mr Talbot’s involvement and the ‘perception’ of bias towards a family member.

If your team or organisation needs support navigating a workplace investigation, please get in touch with BDO’s Forensic Services team today.