Intended audience: Professional Accountants in Business
A Finance Director (FD) of a manufacturing company controls the budget and approves selection of suppliers for materials etc based on submission and recommendation by the Purchasing Manager. Having the authority to make the final decisions, he has been approached and persuaded to enter into a preferential agreement with a supplier. The assessment and decision were not only based on the level of service & quality of materials supplied but the added incentives of him personally receiving gifts of his choice in exchange for selecting the preferred supplier. The value of the gifts is contingent on the amount of materials purchased. The FD has received gifts previously and does not see any reason why he should not receive the gifts.
In certain circumstances, suppliers offer incentives / inducements to gain a favourable decision from the decision maker. However, by accepting such incentives / inducements, is the FD engaging himself in unethical conduct?
Being a member of ISCA, a professional accountant in business, under Part C of ISCA Code of Professional Conduct and Ethics (the Code), Section 350: Inducements, paragraphs 350.1 to 350.4 provide guidance on “receiving offers”.
Considerations / Recommendations:
1) Will the offers of Incentives / Inducement create threats?
Paragraph 350.2 states that “offers of inducements may create threats to compliance with the fundamental principles. When a professional accountant in business or an immediate or close family member is offered an inducement, the situation should be carefully considered. Self-interest threats to objectivity or confidentiality are created where an inducement is made in an attempt to unduly influence actions or decisions, encourage illegal or dishonest behaviour or obtain confidential information. Intimidation threats to objectivity or confidentiality are created if such an inducement is accepted and it is followed by threats to make that offer public and damage the reputation of either the professional accountant in business or an immediate or close family member.”
In this case, the FD should consider whether the incentives offered will create the threats before accepting and it appears to be yes as the supplier was selected not only based on the quality of services and materials provided and the price but the added incentive of FD personally receiving gifts in exchange for engaging this preferred supplier over other suppliers. S elf-interest threats to objectivity therefore created
2) What constitute significant threats?
Paragraph 350.3 states that “the significance of such threats will depend on the nature, value and intent behind the offer. If a reasonable and informed third party, having knowledge of all relevant information, would consider the inducement insignificant and not intended to encourage unethical behaviour, then a professional accountant in business may conclude that the offer is made in the normal course of business and may generally conclude that there is no significant threat to compliance with the fundamental principles.”
In this case, the FD should inform and declare to the management / Board of Directors or higher authorities (ie: 3rd parties) about the incentives and other relevant information before accepting and engaging the preferred supplier. Should the 3rd parties, having knowledge of all relevant information, consider or deem that the inducements is insignificant and not intended to encourage unethical behavior, then it may be concluded that the offer is made in the normal course of business.
3) What are the safeguards in the event that significant of threats is unclear?
Paragraph 350.4 states that “if evaluated threats are other than clearly insignificant, safeguards should be considered and applied as necessary to eliminate them or reduce them to an acceptable level. When the threats cannot be eliminated or reduced to an acceptable level through the application of safeguards, a professional accountant in business should not accept the inducement. As the real or apparent threats to compliance with the fundamental principles do not merely arise from acceptance of an inducement but, sometimes, merely from the fact of the offer having been made, additional safeguards should be adopted.
A professional accountant in business should assess the risk associated with all such offers and consider whether the following actions should be taken:
- Where such offers have been made, immediately inform higher levels of management or those charged with governance of the employing organisation;
- Inform third parties of the offer – for example, a professional body or the employer of the individual who made the offer; a professional accountant in business should, however, consider
- seeking legal advice before taking such a step;
- Advise immediate or close family members of relevant threats and safeguards where they are potentially in positions that might result in offers of inducements, for example as a result of
- their employment situation; and
- Inform higher levels of management or those charged with governance of the employing organisation where immediate or close family members are employed by competitors or potential suppliers of that organisation.
The FD should have considered the above (1) and (2) prior to accepting and engaging the preferred supplier. In the event that the significance of evaluated threats is unclear, the above safeguards should be considered and put in place. Should the FD kept receiving the incentives without the above considerations and safeguards, his professional conduct and ethics and compliance with the fundamental principles are in question.
4) What are the other considerations by the management to prevent such incident?
As it is essential that adequate safeguards should be implemented to ensure that there is sufficient and appropriate control to deter such kick-backs from occurring.
Entities should have a proper procurement and purchasing policy in place, which will require those negotiating contracts, obtaining quotations and placing orders employees or authorities to perform the following:
- Disclose to the senior management of any possible personal interest in the purchasing transaction;
- Deal with all suppliers in an honest, impartial manner and not to prejudice any fair and open competition; and
- Not accept kicksacks (eg: gifts, prejudiced discounts etc).
Another safeguard to prevent kicksacks from occuring is by maintaining a register to record receipt of any form of benefits by any employees of the organisation. On a periodic basic, senior management should peruse through the register.
In reviewing the register, senior management should look out for the following:
- that the acceptance of the benefits did not materially influence decision-making;
- that it will not be perceived by third parties as being unethical;
- that it is not prejudicial to the entity.
Finally, to ensure that the interests of the entity have not been compromised, there should be documentation of the (qualitative) reasons for entering into contracts other than those resulting from a (quantitative)competitive tender process.