Importance of Procurement Audits for Organizations in Kenya

Understanding the Procurement Process: Steps and Risks Involved

In recent years, there has been a growing focus on procurement audits for organizations in Kenya. This is due to the increasing recognition of the importance of procurement audits in achieving organizational goals and objectives.

Procurement is an essential function in every organization as it deals with the process of acquiring goods and services required for the organization’s operation. Given its complexity, procurement is prone to various risks, which may lead to financial losses, legal issues, or reputational damage. This is why an internal audit on procurement is necessary. In this blog, we will discuss the procurement process, risks in procurement, and the importance of procurement audits.

Procurement Process

Effective procurement processes ensure that the organization obtains value for money, minimizes risks, and maintains a good reputation. Procurement is a complex process that involves various steps including;

1. Identifying the need: This involves determining what goods, services, or works are required to meet the organization’s objectives.
2. Budgeting: The organization should determine the amount of money available to spend on procurement and ensure that it aligns with its financial plan.
3. Procurement planning: This involves determining the appropriate procurement method, developing procurement timelines, identifying potential suppliers, and specifying the procurement requirements.
4. Supplier selection: The organization should evaluate and select the most suitable suppliers based on the requirements specified in the procurement plan.
5. Contract negotiation: The organization should negotiate contract terms with the selected supplier(s) and ensure that the terms are legally binding.
6. Contract management: Once the contract is awarded, the organization should ensure that the supplier(s) adhere to the terms and conditions of the contract and deliver the goods or services on time.
7. Quality control: The organization should monitor the quality of goods or services received to ensure that they meet the specified standards.
8. Payment: The organization should ensure that payments are properly authorized and approved, made in a timely manner, and accordance with the terms of the contract.
9. Record-keeping: The organization should keep accurate records of all procurement activities, including contract documents, purchase orders, invoices, and receipts.
10. Performance evaluation: The organization should evaluate supplier performance periodically to ensure that they are meeting the organization’s needs and delivering value for money.

Gaps and Risks in Procurement

Following its complexity, it is prone to various risks, including but not limited to:

1. Fraud and corruption: Procurement fraud involves any illegal activity that is committed during the procurement process, such as bid rigging, bribery, or kickbacks which can result in significant financial losses to the organization.
2. Non-Compliance: Failure to comply with relevant laws, regulations, and organizational policies can lead to legal issues, fines, or reputational damage.
3. Inadequate Contract Management: Poor contract management can lead to contract disputes, cost overruns, and legal issues.
4. Poor Supplier Performance: Poor supplier performance can lead to delays, quality issues, and increased costs.
5. Conflict of Interest: Procurement decisions should be free from any conflict of interest
6. Inadequate Documentation: The procurement process should be adequately documented to provide evidence of the process followed.
7. Inadequate procurement policies and procedures: This refers to the absence or inadequacy of well-defined policies, procedures, and standards governing the procurement activities of an organization, and it poses a significant risk in procurement as it can lead to fraud, corruption, waste, and missed opportunities.

The Importance of Procurement Audit

A procurement audit is a comprehensive review of an organization’s procurement process, policies, and procedures. The audit is designed to evaluate the effectiveness of the procurement system, identify gaps and weaknesses in the process that could lead to inefficiencies, errors, or fraud, and provides recommendations to improve the system’s efficiency and effectiveness. The primary purpose of a procurement audit is to ensure that the organization’s procurement process is effective and aligned with the organization’s strategic objectives.

Here are some key reasons why procurement audit is important:

1. Ensures compliance: Procurement audit ensures that procurement processes and procedures are compliant with relevant laws, regulations, and organizational policies. This helps to minimize the risk of legal and financial penalties that can result from non-compliance.
2. Enhances efficiency: Procurement audit helps to identify inefficiencies in the procurement process and to recommend ways to streamline and optimize it. This can lead to cost savings, improved productivity, and better resource utilization.
3. Improves transparency: Procurement audit promotes transparency by ensuring that procurement processes are open, fair, and competitive. This helps to build trust and confidence among stakeholders and reduces the risk of fraud and corruption.
4. Mitigates risk: Procurement audit helps to identify and mitigate risks associated with procurement, such as supplier defaults, delivery delays, and quality issues. This helps to minimize the impact of these risks on the organization’s operations and reputation.
5. Promotes continuous improvement: Procurement audit provides feedback on the effectiveness of procurement processes and procedures and helps to identify areas for improvement. This promotes continuous improvement and ensures that the organization’s procurement function remains up-to-date and relevant.
6. Achieving Cost Savings: A procurement audit can help to identify opportunities for cost savings in the procurement process. This can help the organization to achieve its financial goals.
7. Stakeholder Confidence: Procurement audit helps in building stakeholder confidence by ensuring that the procurement process is transparent, efficient, and effective. This includes building the confidence of suppliers, customers, and investors.

A procurement audit is essential for organizations in identifying these potential risks and gaps in procurement processes and providing recommendations for addressing them. With effective procurement audits, organizations can ensure transparency and accountability, prevent fraud and corruption, and obtain value for money from procurement activities. Therefore, organizations should invest in internal audits of procurement to ensure that their procurement process is effective, efficient, and transparent.

How we can help

Our services involve assisting clients with the execution of business process improvement. We do not just find where attention must be focused, but we also highlight areas that are over-controlled and showing whether too much time and cost is going into a particular aspect of operations without benefit. Contact our Internal Audit team.