This is the second in a series of articles on red flags and this week's article focuses on purchasing and inventory. Red flags may represent subtle or somewhat more obvious vignettes that "something is wrong with this picture" that can be sometimes overlooked by executive management or supervisors. Accordingly, an essential aspect of internal controls is to train appropriate staff to increase their awareness of and to be monitoring for various red flags that are relevant to various control areas.
Red flags associated with purchasing and inventory include:
- Turnover of staff that have various roles related to procurement processes on campuses or in organizational units
- Indication that select principals or departmental supervisors have delegated their approval responsibilities for purchase orders and other procurement transactions
- Purchase orders or other procurement transactions that do not accurately explain the funding source(s)
- Purchase orders or other procurement transactions indicating sole source without due diligence to vet the vendor’s claim (it’s hard to prove sole source without a request for proposal or request for information process)
- Unexpected levels of product substitutions or delivered products that do not meet bid specifications
- Unexplained increased levels of returned items
- Unexplained increased levels of complaints about products or services
- Unexpected patterns where increases in purchased inventory do not align with increases in activities or services (or where suspension or discontinuation of select activities or services occurred)
- Unexpected patterns in inventory shrinkage
- Excessive inventory levels
- Incomplete inventories
- Charges without supporting documentation, including shipping documents
- Purchases from vendors who aren’t on an approved vendor list
- Purchases from new vendors not on the approved vendor list
- Inadequate physical security over assets/inventory
- Bypassing normal purchasing procedures and processes by select staff, especially involving staff with contract administration authority
- Purchases that circumvent the centralized purchasing office representing variances from standard protocols
- Staff that maintain separate filing locations for select contracts representing variances from standard protocols for file storage/archival practices
- Items delivered that do not meet specifications
- Apparent lack of delivered professional or nonprofessional services
- Apparent lack of delivered materials and supplies
- Insufficient details on vendor invoices
- Purchases from vendors that are difficult to locate by physical address
- Purchases from multiple vendors with the same address
- Purchases from one or more vendors matching employee addresses
- Purchases from a district’s employee’s business
- Lack of vendors’ competition in submitting quotes, proposals or bids
- Favoritism towards select vendors
- Continuous extension of contracts without competitive procurement
- Lack of serial numbered documents for receipts or invoices
- Lack of supervisor’s review and approval of procurement documents
Any indications or observed red flags should be promptly evaluated and consideration be made for prompt follow-up or investigation. In most instances, red flags are signs that relevant manuals for practices, procedures, processes and key controls should be reviewed and modified, as needed, and staff should receive additional relevant training to improve their skills and expertise. Red flags should be covered during after-action reviews to evaluate strengths and opportunities for improvement. Invariably most red flags are more recognizable as 20/20 hindsight.
It’s important to note that red flags do not stand on their own as an indication that fraud has occurred. When should a school official refer a matter to law enforcement? In all instances, this should be done only after consultation with the district's attorney-on-retainer, which was covered in a prior article titled Internal Control Tip of Week - When Do You Refer a Matter.