Purchasing Procedures and Practices
The objective of the audit was to assess whether purchases of goods and services are conducted in accordance with relevant legislation, Government policies and guidelines, and sound purchasing principles and practices. The audit at each entity covered the internal control framework for purchasing and purchase transactions during 2002-03 and 2003-04 and, where applicable, was based on the CPGs current at that time. The audit examined all aspects of the purchasing process from the initial requirement for purchase through to the delivery of the supply and payment. It included an examination of aselection of individual purchases at each audited entity.
Australian Government entities purchase in excess of $15 billion worth of goods and services annually.1
Government policy on the purchase of goods and services is outlined in the Commonwealth Procurement Guidelines (CPGs). The core principle of the CPGs is value for money, which requires a comparative analysis of all relevant costs and benefits of each purchasing proposal over the life of the purchase. The CPGs apply to a wide range of Government entities including all agencies operating under the Financial Management and Accountability Act 1997 (FMA Act), and from 1 January 2005, to certain procurements of particular entities operating under the Commonwealth Authorities and Companies Act 1997 (CAC Act).2 The CPGs applying from January 2005 represent good practice and provide relevant guidance for all Australian Government entities. They also include new mandatory procurement procedures.3
Audit scope and objectives
The audit was conducted at the Australian Research Council, CRS Australia, Geoscience Australia, Australian Hearing and the Australian National University. The latter two entities are not covered by the CPGs. In aggregate, the five entities purchase goods and services with a value of more than $400 million annually.
The objective of the audit was to assess whether purchases of goods and services are conducted in accordance with relevant legislation, Government policies and guidelines, and sound purchasing principles and practices. The audit at each entity covered the internal control framework for purchasing and purchase transactions during 2002-03 and 2003-04 and, where applicable, was based on the CPGs current at that time. The audit examined all aspects of the purchasing process from the initial requirement for purchase through to the delivery of the supply and payment. It included an examination of a selection of individual purchases at each audited entity.
Audit conclusion and findings
The ANAO concluded that the five entities were generally making purchases in accordance with relevant Government requirements and sound purchasing principles and practices. However, there were various aspects of each entity's purchasing framework that could be improved. The Government's revised and enhanced procurement policy framework effective from 1 January 2005 has broader application and should provide a stronger procurement environment, as an additional 33 entities are now covered by particular aspects of the CPGs.
The ANAO considered that all entities audited had addressed the main risks of purchasing through the development of their purchasing policies. However, while some entities had considered purchasing risks in their fraud control plans, most had not included purchasing activity and functions in their organisational risk management plan or associated supporting planning material, where these existed. Also, although purchasing thresholds and requirements had been established, they were not always clearly linked to the nature, risks and financial profile of each entity's purchases. Entities also needed to review the purchasing threshold levels and the associated procedures to apply to each level.
All entities had generally established appropriate responsibility and policies for purchasing. There were opportunities, however, for most of the entities to provide more guidance on purchasing processes and/or increase the level of training for officers involved in purchasing.
Entities had, in the main, followed appropriate control processes and their own policies and procedures in conducting purchases of goods and services. The audit did identify instances of breakdowns in purchasing processes, and in the maintenance of documentation for a range of purchases, although these were not systemic or widespread. For example, tender evaluations were not always conducted in accordance with best practice, and quotations obtained were not always recorded on file. As a result, there was a need for improvement in particular purchasing processes and procedures, and overall recordkeeping practices.
The ANAO found several cases where tender evaluation plans were not used. An evaluation plan is considered to be a necessary accountability document that outlines the overall evaluation approach, including providing guidance for the evaluation panel members to assess each evaluation criterion and overall value for money, and should be approved by the delegate prior to tenders closing and the evaluation commencing. There was also a wide variance in the methodology used for assessing tenders. Better practice was exhibited by entities that used a scoring system, weighted the criteria and evaluated price using a costing index. Many of the evaluations examined did not weight or index price, or assess it separately from the other criteria. The ANAO also found that, to varying degrees, all of the entities required relevant staff to sign conflict of interest declarations. However, only some of the entities had this requirement as a part of their purchasing policies.
The ANAO also found some cases where formal contracts had not been entered into for the supply of services. The ANAO considers that a contract should be in place where the nature of the relationship with the supplier involves the need to specify requirements in relation to such matters as confidentiality, intellectual property, insurance, price, performance measures, duration and termination. The ANAO therefore considers that there are only limited circumstances in which a contract would not be required, such as for ‘off the shelf' goods and the provision of services of short duration. There was little information on this aspect in any of the purchasing guidance available. However, most of the entities did enter into contracts for purchases by tender, and most other relevant purchases.
Public reporting of purchasing information was generally completed in accordance with relevant requirements, although a few entities had occasionally overlooked some aspects of the requirements. Review of purchasing activity was mainly through internal audit and to varying degrees, by central purchasing units. The ANAO considers that entities should also monitor purchasing activity through the evaluation of financial purchasing data against the various purchasing threshold levels and the use of performance information, such as lead times and variances from standard policy. Such monitoring would assist entities in assessing the effectiveness of existing policies and procedures. Entities should incorporate periodic reporting of the purchasing performance information into their overall management reporting arrangements.
The ANAO has made eight recommendations designed to strengthen Australian Government entities' purchasing activities.
The five entities examined in the audit agreed with the recommendations or in a few instances, agreed with qualification. In addition, the Department of Finance and Administration, as the policy department for the CPGs, responded positively to the audit report.4
1 Operating expenditure paid to suppliers; in addition, payments to suppliers for property, plant and equipment, and intangibles are in excess of $4 billion annually (Commonwealth of Australia Consolidated Financial Statements for the years ending 30 June 2002, 2003 and 2004, Consolidated Statement of Cash Flows by Sector: General Government).
2 At the date of preparation of this report, there were 33 CAC Act entities listed under Regulation 9 of the Commonwealth Authorities and Companies Regulations 1997 for which aspects of the CPGs apply. All of these entities have been listed since the implementation of the Australia - United States Free Trade Agreement (AUSFTA) from 1 January 2005. The CPGs are mandatory for these entities where the procurement of property or services other than construction services exceeds $400 000 or construction services exceeds $6 million.
3 For example, in the absence of mitigating conditions, FMA Act agencies must now use open tendering for purchases over $80 000. Under the previous CPGs, agencies could choose their own tendering thresholds.
4 Entities' comments are provided in the relevant section of the report to which they refer or in Appendix 1.