Building a robust system for managing conflicts of interest in procurement: lessons from the ANAO
Several recent ANAO performance audit reports highlight the need for vigilance in the area of probity and conflict of interest.
Procurement and funding are core businesses for Commonwealth entities, and probity is a key consideration. However sometimes probity is ignored, misunderstood or the intricacies of conflict of interest are not appreciated. But to achieve robust management of conflict of interest, you first need to identify the actual, potential or perceived conflicts of interest, and then analyse their impact. Only then will you be in a strong position to comfortably manage the risks.
You certainly can't just ignore the potential that conflict of interest may arise. Two recent ANAO Performance Reports (1 and 16 of 2016-17) have highlighted some of the major ways to build and maintain a robust culture of compliance with the ethical and legal requirements of Commonwealth procurement.
Your legal obligations to act ethically in procurements
Section 15 of the Public Governance, Performance and Accountability Act 2013 (PGPA Act) sets out the ethical requirements for Commonwealth procurement.
The Commonwealth Procurement Rules promote the efficient, effective, economical and ethical use and management of public resources. Ethical behaviour identifies and manages conflicts of interests, and does not make improper use of an individual's position. Those undertaking procurement must recognise and deal with actual, potential and perceived conflicts of interest.
Identifying conflicts of interest - building an ethical procurement culture
There are various approaches that an organisation can take in relation to probity and conflicts of interest. This can range along a spectrum from a genuine interest in conducting ethical transactions to a tick-the-box, process-based approach to probity and ethics.
The recent ANAO reports have underscored the need to remove any cultural hurdles to probity, as they may hinder an organisation's full compliance with section 15 of the PGPA Act.
Some of those cultural hurdles with employees or contractors are:
- no proper understanding of why ethics and probity must be maintained;
- a natural reluctance to disclose details about their or their family's private affairs on a declaration form;
- a fear that they will not be permitted to work on the procurement, will not be promoted, or that the contractor will lose business with your organisation; and
- a belief that they only need to declare a conflict of interest if they intend to act in a dishonest or improper way.
This can be addressed by education, information, and an appreciation that briefings and disclosures are not pure lip service, but will:
- educate the individuals involved in the procurement / funding;
- reduce your legal and probity risk; and
- ensure you comply with the risk and ethics framework established by the PGPA Act and CPRs.
At a minimum, all those involved should:
- be briefed as part of the transaction about the meaning of actual, potential and perceived conflicts of interest and given appropriate disclosure forms;
- understand that if they do not make full, adequate and ongoing disclosure of conflict of interest, they could suffer major damage to their career and reputation, as well as cost the organisation significant unnecessary costs and wasted effort;
- not attempt to manage the content of his or her declaration form - they must declare all actual, potential and perceived conflicts, no matter how small, or how long ago; and
- be asked to complete disclosure forms accurately,
Your probity adviser must work carefully with all personnel in relation to the confidentiality of the process. Disclosure forms contain highly sensitive, personal information, and must be handled appropriately.
Who must make declarations of a conflict of interest?
If someone is working on the procurement or has potential to influence the procurement, they should make full disclosure of actual, potential and perceived conflicts of interest.
This includes the decision-maker, your organisation's executive, if they will be making recommendations or approving key decisions in the procurement, contractors used as subject-matter experts, advisers (including business, financial and legal advisers) and your employees who are involved in the procurement / funding process.
Confusion can arise when an organisation utilises a contractor who operates through a corporation. Should the declaration be made by the individual, or by his or her corporate entity? There are differing opinions on the answer to this question. A safe choice is to require both individual and corporate declarations.
Analysing and managing declared conflicts of interest
A central goal is to determine if a declared conflict could - on balance - call into question the compliance of the procurement or funding process with the PGPA Act's ethical and probity standards.
Each declared conflict of interest will need to be considered on a case by case basis. If, however, a series of declarations from one person, or a set of declarations from a group of people, raises questions in your mind, these should be considered as a whole as well as on a case by case basis.
All probity issues should be discussed with your probity adviser and/or legal adviser. Your adviser will be well placed to consider the issues raised by each declaration, and to assist the organisation to balance the need to use a good team of people for the procurement, against PGPA Act and legal risks associated with ethics, probity and the conduct of a defensible procurement or funding process.
Any management process should be documented.
Managing declared conflicts of interest if a fiduciary is involved
If your organisation places a considerable level of trust and power in its employees and/or contractors in relation to a procurement - for example, the delegate, chair of an evaluation committee or negotiation team - the individuals may also be subject to fiduciary duties towards the organisation.
If a fiduciary has fully and frankly disclosed a conflict of interest, and the organisation has permitted that individual or corporation to continue to work as a fiduciary, the organisation has given Boardman v Phipps informed consent to the conflict. This passes the probity risk and associated costs squarely to the organisation.
Keeping track of conflicts of interest
ANAO Performance Reports 1 and 16 of 2016-17 highlight problems that arisen when a common gap in probity process is left open. Disclosure forms were either not completed or were completed but not retained on file.
Conflict of interest should remain on an evaluation committee's agenda so that as circumstances change, actual, potential and perceived conflicts of interest can be fully disclosed.
It is critical that declarations be recorded, tracked and a conflict of interest register be maintained. An efficient document management system will promote record-keeping and avoid an unwieldy administrative burden on either procurement staff, or the probity adviser. This is particularly important if you are working on a complex or high-value procurement or funding allocation which has geographically dispersed personnel or which involves turn-over of personnel.
Bringing in a probity auditor for a regular health check
Finally, the ANAO's recent reports highlight the good practice of a probity audit in appropriate cases; if used in a timely way, it will prevent unnecessary costs, expenses and legal risks being incurred. A probity auditor should be external to the procurement but not be the probity adviser
- Contracting with government - are you conflicted?
- New governance rules make audit committee a priority for Commonwealth entities
Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.