Part 4: Sourcing practices

4.1
In this Part, we consider whether Inland Revenue is following relevant rules and policies when sourcing goods and services. We discuss:

• non-compliance with rules and policies;
• the need for Inland Revenue to apply and document quality controls better;
• the need for Inland Revenue to improve its information management; and
• the need for Inland Revenue to document probity better.

Summary of findings

4.2
The introduction of its new approach to procurement is a positive step forward for Inland Revenue, but we found weaknesses in compliance with good practice for sourcing that Inland Revenue needs to address. Inland Revenue needs to improve these important aspects of its sourcing practices to ensure that its new approach can be successfully applied.

4.3
There were some instances of non-compliance with rules and policies in our review of some individual procurements. One instance was more significant and could expose Inland Revenue to the risk of legal challenge.

4.4
The Commercial and Procurement team does not have a structured approach to compliance or quality control but expects documents to be checked and signed off by the right people at the right times. Poor information management for procurement meant we could not tell whether this is happening and means that Inland Revenue does not know whether checks and sign-offs are happening as intended.

4.5
Inland Revenue's Probity Assurance Plan is out of date, and the Commercial and Procurement team does not consistently follow it. For example, there was limited documentation about some probity decisions, which means that decision-making about procurements is not always transparent.

Rules and policies are not always complied with

4.6
Inland Revenue expects staff to comply with relevant rules and processes, including the Government Rules of Sourcing (see Part 2). To support staff to follow the Rules, Inland Revenue has created its own policies and procedures. These policies and procedures outline Inland Revenue's approach to procurement and provide guidance, such as who has the authority to sign contracts and other important documents.

4.7
Inland Revenue has also put several processes and tools in place to support compliance. They include checklists, templates, and practice notes prepared by the Commercial and Procurement team's performance and capability team. These are available on the Commercial and Procurement team's intranet site. The programme also has a detailed sourcing strategy, which has clear objectives and is consistent with the Rules.

4.8
We reviewed information and data from five large and seven smaller procurements to assess whether the Commercial and Procurement team was complying with the Rules and Inland Revenue's own policies. Inland Revenue was not able to provide all the information we needed to carry out this part of our audit. We based our assessment on the information that was available.

4.9
One procurement we looked at had a significant non-compliance issue. Inland Revenue had accepted an alternative price submission from a supplier late in the submission process but did not give the same opportunity to the other short-listed supplier. This is not good practice and does not comply with the Rules.

4.10
As well as this issue, there were several incidents of poor practice and non-compliance. For example, we could not find supporting documentation for contract variations, and there was incomplete documentation about conflicts of interest. Based on the available evidence, these examples appear to be the result of poor awareness or understanding of the Rules and Inland Revenue's policies. We did not find any evidence of intentional non-compliance.

4.11
For the individual procurements that we looked at in detail, planning and justification were generally done well. However, there is still room for improvement in two aspects of procurement:

• Panel of pre-approved suppliers: Inland Revenue is increasingly using panels of pre-approved suppliers for procurement. There needs to be better documentation of the justification and appropriate planning for the selected approach, as well as a consideration of any risks.
• Conflict of interest declarations: Conflict of interest declarations were not fully completed and retained in all instances. Inland Revenue needs to ensure that conflict of interest declarations are reviewed in a timely way so that any issue can be managed before it causes any problems to the process.

4.12
The individual procurements we looked at to check for compliance are from before Inland Revenue restructured its procurement function. However, Inland Revenue's new procurement approach must still comply with the Rules and Inland Revenue's own policies. For example, the Rules apply to relevant agencies regardless of the overall approach individual agencies might take.

4.13
We consider that Inland Revenue is in a good position to make the improvements that we have identified. Inland Revenue is expecting the new Commercial and Procurement team to tighten up practices and bring more rigour to procurement processes.

4.14
The Commercial and Procurement team was working on some improvements at the time of our audit. It was too early to assess the effectiveness of these improvements. Inland Revenue needs to ensure that the improvements it makes strengthen compliance.

Quality controls need to be better applied and documented

4.15
We did not see evidence of quality controls being consistently applied to all of the procurements we looked at. The Commercial and Procurement team's approach to quality control is to ensure that the appropriate people review and sign off documents at appropriate times. This helps to pick up errors or identify any non-compliance that might occur.

4.16
The Commercial and Procurement team has processes in place to support quality controls. These processes include peer review, managerial review, a delegation matrix, and external probity advice. The template for procurement plans includes a table that shows who has to approve important documents or stages of a procurement.

4.17
The Commercial and Procurement team also uses cover notes to help check compliance with relevant rules and policies before procurements and contract renewals are signed off. Cover notes can include information such as contract value, applicable rules, and available funding sources. This means that, when the appropriate people sign off procurements, they have the information they need to understand what they are signing and whether it is appropriate for them to sign.

4.18
Although we were told about these quality controls and saw the requirements of different control points described in the procurement plan template, we did not see evidence that the Commercial and Procurement team consistently applies them in practice.

4.19
This means that neither we nor Inland Revenue can be sure whether the Commercial and Procurement team is routinely complying with the Rules or with its own policies and procedures. Given that, we found several examples of non-compliance, Inland Revenue needs to urgently improve how it applies and records quality controls for procurement.

Information management for procurement is inadequate

4.20
Poor information management for procurement made it difficult for Inland Revenue to show us that it is routinely checking compliance with the Rules and its own policies. It also affected how we did our audit.

4.21
We wanted to review a range of procurements to ensure that they complied with the Rules and Inland Revenue's policies. However, the Commercial and Procurement team struggled to find the documentation that we asked for, and we had to reduce the number of procurements we intended to look at. Even then, the documentation for these procurements was incomplete and spread between different locations.

4.22
For example, in some procurements that we looked at, there was a lack of available records to show that correct procedures had been followed. This meant that we could not make a reliable judgement about how well the Commercial and Procurement team complies with the Rules or Inland Revenue's policies. We also could not make a reliable judgement about how consistently the team applies procurement practices or quality assurance controls.

4.23
An internal audit of procurement was expected to be completed in mid-2017, but it was delayed because the auditor had issues acquiring the relevant information.

4.24
The software programme that Inland Revenue uses to support procurement is not fit for purpose. It does not support workflows or the approvals process for contracts, and it is confusing for staff who use it. Inland Revenue is aware of these limitations and is in the early stages of acquiring a new software programme. Inland Revenue is currently collaborating with other government organisations that are looking for a similar product.

Probity is not well documented

4.25
In the procurement context, probity means making sure all suppliers have a fair opportunity as part of a process that is transparent, impartial, and equitable. It is important that Inland Revenue applies probity principles when procuring goods and services.

4.26
Organisations can get assurance about how well they have applied probity in several ways. Probity audits are one example. Probity audits provide an independent perspective and give assurance to all parties involved in the procurement process that all suppliers have had a fair opportunity and that the procurement process has been carried out transparently and impartially. Suppliers are also more likely to feel they can raise a concern if an independent party is involved.

4.27
Inland Revenue has decided to use probity advisors to check probity on a case-by-case basis. It has appointed lawyers for this purpose. Inland Revenue also provides staff with high-level guidance on how to conduct themselves when engaging with the supplier market to ensure that they comply with Inland Revenue's probity principles. This means that Inland Revenue expects staff to ensure that procurement is conducted fairly and understand what they need to do if there are barriers to this.

4.28
Inland Revenue's Probity Assurance Plan outlines the probity principles and procedures that apply to procurements for the programme. The plan sets out the probity requirements and obligations for each stage of the procurement process. It is intended to help ensure "that documented processes are applied, a clear audit trail is established and decision-making is fair, transparent and defensible".

4.29
The plan, published in 2014, has not been updated since Inland Revenue restructured its procurement function. It does not reflect the current governance arrangements for the programme or the restructured Commercial and Procurement team.

4.30
In the procurements that we looked at, the Commercial and Procurement team was not always applying the principles and requirements of the Probity Assurance plan. In particular, it did not document well the procedures for obtaining and acting on probity advice.

4.31
In one instance, probity advice was sought from Inland Revenue's external probity advisor but not acted on. In our view, there was inadequate documentation to give assurance that decision-making was fair, transparent, and defensible.

4.32
Inland Revenue needs to document decisions about probity issues more clearly. Individual procurement plans need to also set out the probity approach for that procurement so that this is clear from the outset.

4.33
For a programme of this scale and complexity, we expect Inland Revenue to be confident it is procuring goods and services for the programme in a transparent and impartial way. Because of the lack of probity audits and its weaknesses with probity processes, Inland Revenue needs to assure itself, its suppliers, and taxpayers that it has adequate probity assurance arrangements in place.