Red Flags for Procurement — A Clear Separation of Duties is the First Step
When I first started in the timber business, I was given a checkbook and a stack of contracts and was told, “Get out there and buy some timber.” Sounds crazy to some, but this practice was typical at the time and likely still is with with smaller companies and wood dealers who have fewer employees. Each employee is expected to wear several hats. In today’s environment, however, timber purchasing companies, whether small or large, can’t afford to have such a casual procurement process. Even with a few employees, careful planning can ensure there remains a separation of duties and a business control environment that keeps people honest.
Other areas to consider:
1. Contracts – Well-written contracts and careful monitoring of their execution are the basis for establishing an unambiguous agreement that protects the interests of all parties and provides documentation for identifying and proving fraud. Red flags in this area could be::
- Separate contracts for different products on the same tract such as one for pine and another for hardwood. (NOTE: This can make the final analysis of tract completion tricky and can create problems on the ground.)
- Altered or unsigned contracts
- Frequent requests for extensions on contracts
- Missing parts of contract files such as maps, original cruises, etc.
- Delays in recording contracts (NOTE: This can lead to failure to record the contract at all which opens up opportunity for theft.)
- Timber tracts which cut out almost to the penny. If you have cruised timber, you know your odds of all of them being on the money are astronomical.
- Mention of a finder’s fee or marking fee buried in the details of the contract.
- A high percentage of tract purchases are through the same timber broker. (NOTE: Perhaps you should consider hiring the timber broker and get rid of the forester?)
- Foresters changing hauling rates on contracts during harvest. Haul rate manipulation can hide kickbacks.
2. Complaints – We all know complaints are going to come occasionally in the procurement business and legitimate complaints help us improve our business. However, consistent complaints concentrated in one area or region become a red flag requiring further investigation. Investigate all complaints, but especially those from:
- Landowners lodging similar complaints against one particular forester.
- Foresters resisting changes in operations or personnel. Although resisting change is human, exaggerated concerns can be an effort to avoid scrutiny. Process changes require new ways of getting around the system.
- Foresters constantly blaming loggers for undercuts can be an excuse for “kiting.” Kiting occurs when timber is “reallocated” from one tract to another.
- Wood contractors complaining about being paid incorrectly.
- Loggers complaining about mileage payments and hauling fees. Check the details of the complaint and verify the contract details with the settlement details to ensure unauthorized deductions aren’t taking place.
3. Deeds/Agreements – Red flags around deeds and/or purchasing agreements focus on ensuring the timber you are buying actually belongs to the seller. Be wary of the following:
- The name on the deed differs from that of the seller.
- You don’t receive timber deeds or agreements from your foresters.
- The timber tract files don’t contain correspondence with the landowners.
- Deeds or agreements that split the land and the timber.
- Company land sales can pull the rug out of “normal operations” for procurement foresters making them disgruntled enough to justify getting even with the big company that sold the land.
4. Payments and Record-Keeping – Here are a few things to look out for on the administrative end of the transaction, especially with regard to actual check payments:
- Checks are received by the forester instead of going directly to a lockbox or accounting.
- Records of company checking accounts where an employee is authorized to sign checks.
- No original documents on file. Copies are much easier to fake than originals and could leave you with no documentation. In a world of e-files, this gets more difficult to monitor.
- Forged or differing signatures on checks.
Many of the red flags within procurement operations center on the contract administration, e.g., terms and conditions, completeness and accuracy of documentation and payments. Use the following recommendations to ensure you are covering the basics of your procurement processes:
1. Ensure you have a segregation of duties within your own company, especially between the purchaser, the contract administrator and accounts payable. Create approval levels for contracts and payments and clearly define job responsibilities. If you’re in a small company that can’t do this, then business operations and controls will need a higher level of scrutiny.
2. Compare cruise numbers against actual cut numbers on each contract. If this isn’t being done, then why bother with the cruise to begin with?
3. Conduct trend analyses of critical elements of the process such as harvesting costs, hauling costs, road building costs, and finder’s fees. Reports in these areas will indicate what normal is and highlight unusual costs. One example, if a region manager notices one forester has higher road costs than the other foresters in the region, this is a red flag requiring more investigation. Trends over time tell a story and reveal problem areas you might easily miss in the day-to-day operations.
4. Know your surroundings – the market availability, the competition, and the unusual markets such as firewood, mulch, cedar posts, etc.
5. Establish clear paper trails. Ensure your processes are followed and all documentation is complete accurate and original (no copies).
6. Conduct periodic audits of your process, including the documentation files, exception reports, and your trend analyses. Consider using outside auditors to get a fresh, professional, unbiased view.
7. Cross-reference all mailing addresses to ensure the proper person is contracted and paid.
8. Train your employees to look for red flags and establish a process for reporting discrepancies.