This edition of audit insights summarises key messages from Australian National Audit Office (ANAO) performance audits about the management of conflicts of interest by Australian Government entities in relation to procurement activity and grants programs.
This edition of audit insights summarises key messages from Australian National Audit Office (ANAO) performance audits about the management of conflicts of interest by Australian Government entities in relation to procurement activity and grants programs. The ANAO has also considered messages from the work of various state anti-corruption bodies.
A conflict of interest occurs where a person’s personal interests, affiliations or relationship prejudices impact on their impartiality, or might be perceived by a reasonable person as potentially prejudicing their impartiality, or result in an incompatibility with the duties owed to the entity undertaking a procurement or administering grants.This includes situations where a person has been offered a gift or benefit by a person or organisation involved in bidding for a procurement or grant.
Conflicts of interest may also extend to organisations as whole, including non-Commonwealth third party organisations. For example, in situations where an organisation has been contracted to provide advice to an Australian Government entity in relation to a grants program or procurement activity, and the organisation also has a commercial relationship with a grant applicant or procurement tenderer.
Effective management of conflicts of interest should be a central component of an entity’s integrity framework. Poor practice, or the perception of poor practice, in the management of conflicts of interest will undermine trust and confidence in an entity’s activities.
The Australian Public Service (APS) Code of Conduct requires that APS employees take reasonable steps to avoid any real or apparent conflict of interest.Where conflicts cannot be avoided, the relevant provisions of the Public Service Act 1999, the Public Governance, Performance and Accountability Act 2013 (PGPA Act), and Public Governance, Performance and Accountability Rule 2014 (PGPA Rule) require that persons must disclose details of any material personal interest. For those Australian Government entities where the accountable authority is a board, board members must generally exclude themselves from any discussion or decision regarding the matter on which they have a conflict. The Commonwealth Grant Rules and Guidelines (CGRGs) and the Commonwealth Procurement Rules (CPRs) also have provisions relating to conflicts of interest.
Developing conflict of interest policies
Entity accountable authorities must promote the ethical management of public resources and establish and maintain appropriate systems relating to risk management and oversight and internal controls.This includes policies and procedures regarding the management of conflicts of interest. Such policies and procedures should apply to all contractors, consultants and advisory bodies employed by, or associated with, the entity.
Under the CGRGs, accountable authorities should ensure that entity policy and management processes for conflicts of interest relating to grants are published to support probity and transparency.While there is no equivalent requirement under the CPRs, publishing policies can assist an entity in making third parties more aware of what situations may constitute conflicts of interest.
In relation to procurement, communicating entity expectations and acceptable practices to suppliers or potential suppliers — through the publishing of policies — can be an effective mitigation strategy. The strategy should be aimed at decreasing the number of offers of gifts, benefits or hospitality made to their staff.The content of policies should be influenced by an entity’s operating environment.
Entities should also ensure that policies on conflict of interest management are consistent with policies relating to gifts and benefits. Both types of policies should reinforce the importance of declaration, and particularly where the staff member is offered gifts or hospitality from a potential tenderer or grant applicant.
In order to comply with section 16 of the PGPA Rule, conflict of interest policies must be approved by the entity accountable authority.
Entities should periodically review the operation of their policy framework to determine whether it is operating effectively. Key areas to be addressed in any reviews include the completeness and accuracy of disclosures and registers, and whether documented management responses have been properly implemented.
It is common for entities to rely on declarations from employees, contractors and advisory bodies to identify any conflicts that may require management.It is important that declarations be scrutinised and considered against other information known to the entity, to identify any associations and potential conflicts that have not been declared. Entities should identity any procurement or grant arrangements or circumstances that involve elevated risk of conflicts. In these instances, the entity should ensure that processes involve a proportionate level of scrutiny, and determine whether a grant- or procurement-specific declaration of conflict is appropriate for any staff, contractors or consultants involved. It is important that:
- declarations be made before the person or entity begins work, and that they are completed in full and signed;
- all relevant individuals and organisations submit declarations as to whether or not they have a conflict of interest. This provides a higher degree of assurance than only requiring a declaration when the individual or organisation considers they do have a conflict ;
- declarations should be timely and relevant. For example, reliance cannot reasonably be placed on general declarations made by firms when they are appointed to a procurement panel in advance of individual work assignments being entered into ; and
- an appropriate process is implemented to monitor whether disclosures may need to be updated, including in cases where the role of individuals change.
Declarations are generally made through completing a form or template supplied by the relevant entity. Entities should ensure that the form or template includes the key forms of conflicts that are most likely to arise in the context of the entity’s activities. In appropriate cases, consideration should be given to whether these should include requiring persons to declare any social media activity or similar action that could reasonably generate perceived conflicts of interest.
Ideally, entities should have an electronic system for declaring and recording conflicts of interest. One of the potential advantages of such systems is that they enable the entity to undertake data analysis to identify potential conflicts with other parties.
To guard against the risk that relevant persons fail to disclose their conflicts of interest, additional measures can be put in place including:
- an internal reporting or complaint-handling function that allows staff and external parties to report perceived or actual conflicts as well as other integrity concerns;
- a data analytics program that can identify suspicious transactions, events or relationships that may reflect a conflict of interest;
- appointing a probity auditor; and
- conducting background and due diligence checks on potential staff, suppliers, contractors and business partners.
Appropriate management of identified conflicts of interests requires entities to take an active rather than passive approach. ANAO audits have highlighted an active approach should include a number of key elements.
Avoiding conflicts is an effective management approach. For example, in the Community Sport Infrastructure Grant (CSIG) Program, the administering entity required all staff assessing grant applications to make declarations, and the grant assessment system prevented a staff member assessing an application where they had declared a conflict.The Australian Research Council adopted a similar process in its administration of the National Competitive Grants Program. The Australian Research Council’s automated Research Management System (RMS) manages conflicts of interest by recording and tracking personal, professional or employment relationships of those persons involved in assessing grant applications. The RMS prevents assessors being assigned to a proposal where there is a known relationship with any named participant or organisation on the applications. The RMS also generates automatic conflict notices at meetings of the Selection Advisory Committee. This alerts all committee members to the conflict, prompting the chair to ask that the conflicted member leave the room whilst the application is discussed and voted upon. In the context of a program involving a high volume of grants on an ongoing basis, the RMS shows that integrating conflict of interest processes into information management systems can deliver enhanced efficiency and assurance.
Conflicts may also be avoided or mitigated through separation of duties. For example, where an entity plays a role in the preparation of a grant/procurement proposal — such as through providing advice to a grant applicant/tenderers on their proposal that it will later assess — a clear separation should be maintained between entity staff or advisors involved in these respective roles. This will assist in maintaining the objectivity of the assessment stage.The following examples highlight the importance of avoiding potential conflicts of interest through an appropriate separation of duties:
- In the Clean Technology Investment Program, applications were ‘reframed’ to improve their assessed merit in terms of published criteria. The reframing was undertaken by the administering department, which changed the project activities, grant amount and/or underlying assumptions to exclude ineligible activities or activities that were considered to not represent value for money. The published program material, and internal program documentation, did not clearly establish the circumstances in which reframing would be undertaken, and the extent of this. Further, applicants were not required to re-submit reframed applications.
- In the $443.3 million grant to the Great Barrier Reef Foundation, a key risk management strategy adopted by the administering entity was to have an internal Reef Project Board review the department’s evaluation of the foundation’s proposal. Two Reef Project Board members had responsibilities that included oversighting staff involved in progressing the partnership with the foundation. In addition, while the entity’s grants administration framework required that conflicts of interest be a standard agenda item for each assessment committee meeting, conflicts of interest issues were not recorded as having been addressed in any of the Reef Project Board meetings. The entity also did not require relevant staff involved in assisting the foundation prepare its proposal, or the evaluation of that proposal, to complete declarations identifying whether they had any perceived or actual conflicts and, if so, the proposed management strategies.
Guarding against employment offers from tenderers or grant applicants
A conflict of interest will arise if a person who is involved in a grant or tender assessment process applies for a job with, or is offered a job by, an organisation who is also applying/tendering for the same grant or procurement process. There are a variety of ways in which entities can manage conflicts in these circumstances. For example, they could include provisions in contracts with successful tenderers to restrict the employment of (former) government employees who managed the tender process. Similar provisions may be included in requests for tender to preclude the solicitation, enticement or engagement of particular employees during the process.Employees should also be advised that applying for a job in an entity that is tendering for work, or applying for a grant from a program in which they are involved, is a conflict that should be declared.
Entities may also put into place other arrangements that are based on the goodwill of parties and their perceptions of mutual benefit, rather being legally enforceable.For example, broad policy guidelines which include suggested periods of time that an employee should wait — after leaving the public service, — before they work in business areas that have direct contact with their former entity. Some entities, such as the Department of Defence, have also developed common understandings of ethical behaviour with relevant industry associations to help promote the acceptance of agency guidelines.
Promote a consistent approach to managing conflicts
Entities should take a consistent approach to how similar conflicts are managed. This can be assisted through including relevant guidance in entity policies and procedures.Guidance should also be provided to grant applicants/tenderers and external advisory bodies or assessment panels.
Where grant and procurement activities involve significant numbers of material conflicts, management can be assisted through considering declarations collectively rather than individually. This enables entities to assess consistency and more fully inform its consideration of the appropriate management approach.
Documenting how conflicts have been managed
Properly maintained probity registers are a useful way of maintaining line of sight between identified conflicts and resultant management actions.For high-risk activities, consideration should be given to developing a specific plan for managing the identified conflicts. Plans should incorporate a mechanism for managers to monitor whether relevant employees or other parties are adhering to the conflict management plan. For entities where the accountable authority is a board, entities should ensure that board papers consistently record declarations of conflicts and board members absenting themselves from any discussions and decisions on items in which a board member has a conflict. Depending on the nature of the entity’s activities, it may also be appropriate for the accountable authority to receive periodic reporting on conflict of interest issues.
Public sector entities are responsible for public resources. The ANAO’s performance audit of the Moorebank Intermodal Company‘s (MIC) procurement process showed that existing relationships (long-term business and/or personal associations) with MIC staff were often the preferred basis for the sole sourcing of service providers or inviting them to participate in tender processes. While relationships with service providers were disclosed between MIC employees consistent with its code of conduct, there was no evidence of any management of these conflicts or formal consideration of conflicts of interest in procurement decisions.
Similar considerations apply when procuring services from third party organisations to conduct program evaluations. For example, the Australian Renewable Energy Agency (ARENA) commissioned eight organisations to undertake program evaluations between 2017 and 2020.Three of the eight parties commissioned to conduct evaluations had also been recipients of ARENA grant funding. ARENA’s conflict of interest policy required: all potential service providers involved in procurement to declare potential conflicts; the relevant ARENA delegate to assess the materiality of declared conflicts; and identify actions to manage material conflicts. However, ARENA was unable to provide evidence that the materiality of these conflicts were considered by the delegate, or that actions to manage material conflicts were documented. The final reports for these evaluations also did not contain disclosure of these potential conflicts and any actions by commissioned organisations taken to manage them.
Culture, training and awareness raising
An entity’s culture with respect to the management of conflict of interest will be determined by the ’tone at the top’ set by its leadership. It is the entity’s senior leadership (particularly the CEO) that employees look to, to determine what behaviour is acceptable and what is not.This is particularly important where entities are operating in an environment where there may be close personal and professional links between entity staff and those in organisations that stand to benefit from entity procurement and grant decisions. An appropriate culture can be encouraged through manager’s discussing conflicts of interest and reviewing conflict of interest declaration forms during key stages of procurement and grant processes.
Entity leadership needs to demonstrate that the completion of conflict declarations is important and not just a perfunctory exercise in record-keeping. This can be done through follow-up actions by management where conflicts declarations are not completed or not kept up to date, providing conflicts of interest training to relevant staff, ensuring that escalation is required where conflicts are declared, and requiring reporting on conflicts to ensure conflict management plans are actioned.
Unmanaged conflicts of interest are more likely where entity culture values expedient processes that are irrespective of risks to integrity. In some cases, conflicts can result in corrupt behaviour when individuals are motivated by private interests and personal profit.
Compliance with conflict of interest requirements can be promoted through regular awareness raising and on-the-job and formal training. The impact of these activities can be reinforced through staff and contractors completing probity awareness declarations. Such declarations can acknowledge receipt of probity awareness training and materials, and agreement to abide by and implement conflict procedures, including notifying their employing entity of any probity issues and declaring any conflicts of interest.Entities can also assist compliance by highlighting to employees the consequences of disregarding conflict of interest processes, including disciplinary action or termination of employment.