Інститут Внутрішніх Аудиторів України

Світове лідерство у професії внутрішнього аудиту та корпоративного управління

The key indicators that point to the possibility of corruption risk in key areas of military activity (Ukrainian experience)

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Author: Colonel Olexandr Tytkovskyi, Head of Territorial Administration of Internal Audit of Military Units directly subordinated to Ministry of Defense and the General Staff of Armed Forces of Ukraine.

Contributor: Colonel Olena Golota, PhD, Associate Professor, Head of Scientific Center of Corruption Prevention in the Safety and Defense Sector, National University of Defense of Ukraine.


INTRODUCTION

  1. 3E approach
  2. The main obstacles and their consequences for defense
  3. Overview of corruption
  4. Contribution of internal audit
  5. The most vulnerable areas of military activity (5 parts) with information from Compendium

MAIN PART

  1. Procurement (main risks, possible corruption component, consequences, red flags)
  2. Allowance / salary
  3. Providing resources
  4. Privatization / Disposal
  5. PPPs / using

CONCLUSION

  1. Importance of proper recognizing of RF
  2. The main benefits of prevention and reducing corruption for military

In today’s world, the optimal allocation of scarce resources among abundant competing alternatives to maximize national security over time and under uncertainty is the fundamental challenge for defense resources management.

This allocation of resources is impossible in practice without applying three basic principles of good governance: Economy, Efficiency and Effectiveness.

Economy covers the financial side on which an activity is achieved. Because we are living in a world in which economics permeates every aspect of our lives, it is fundamental to balance the use of resources to achieve the right goals at the reasonable cost.

Efficiency on the other hand, involves the right use of resources to accomplish a task. It means the wise consumption of inputs on which the work is completed. Once the goals are attained it is important to see how they can be met with the least effort (Audit Advisory Training http://www.en.valuemex.com/node/23).

Effectiveness is the degree to which objectives are achieved and the extent to which targeted problems are solved. In contrast to efficiency, effectiveness is determined without reference to costs and, whereas efficiency means “doing the thing right,” effectiveness means “doing the right thing”(http://www.businessdictionary.com/definition/effectiveness.html).

Modern Ministries of Defense are concerned with effectiveness, to produce the best possible defense forces to satisfy both national and collective security demands, and efficiency, to make the best use of limited budget (Francois Melese, Opportunities and risks with outsourcing, privatization and public-private partnerships in defense, Building integrity and reducing corruption in defense (a compendium of best practices), Chapter 2).

It should be noted that the main obstacles to the achievement of strategic and operational objectives in the security and defense, as well as the objectives of compliance and reporting, are fraud, inefficient managerial decisions, illegal actions and other kinds of improper activity that lead to loss of resources, failure to achieve goals, and inefficient results of activity, etc.

Moreover, we need to keep in mind that these activities may be caused by corruption, which is defined as the abuse of entrusted power for private gain. A characteristic feature of corruption is a conflict between the activities of an official and the interests of the body (authority) on whose behalf he/she acts. Many kinds of corruption are similar to fraud carried out by an official, and belong to the category of ‘crimes against the state (municipal) property’

This activity brings the extremely negative consequences for the country’s defense. Corruption undermines the proper functioning of military bodies by eroding their credibility, legitimacy, and accountability. Such structural units that become paralysed by corruption are unable to properly perform their necessary activity, are unable to maintain the rule of law, and, as a consequences, fail to maintain a safe and secure environment for citizens.

Moreover, corrupt activities have an extremely negative impact on operational effectiveness: reducing interoperability, combat capability and purchasing power of military budget, reducing public trust in the armed forces, facilitating organized crime and undermining trust among the international community (Corruption & Peacekeeping. Strengthening Peacekeeping and the United Nations (Transparency International UK, Defense and Security Program, www.ti-defence.org, October 2013) Corruption Threats & International Missions. Practical Guidance for Leaders (Transparency International UK, Defense and Security Program, www.ti-defence.org, September 2014).

According to a recently published study by the international non-governmental organization Transparency International, despite significant progress, Ukraine is in a group with high risks of corruption. The recommendations of international experts are unambiguous – anti-corruption efforts should be doubled.

In two areas there was clear progress, namely: the activities of the Building Integrity Training Education Center of National University of Defense of Ukraine and in internal audit.

The contribution of internal audit should be mainly seen in the context of building integrity, spreading an anti-corruption culture, and sustaining an environment of ‘zero tolerance’ to corruption. In accordance with applicable law and generally accepted international standards, the internal audit activity is mainly focused on the analysis and assessment of the effectiveness and efficiency of the internal control system.

During the execution of their direct functional duties, internal auditors mainly deal with violation of the law, inefficient use of public resources and assets, failure to comply with procedures, neglect of duties, poor management practices and so on.

However, the internal auditor should (Pict. 1):

  • consider the possibility that corruption could be present in each of these kinds of activity;
  • evaluate anti-corruption strategies (programs);
  • recognize signs that may indicate corruption or abuse of power during the control measures, and (if necessary) conduct an appropriate audit;
  • provide recommendations to prevent corrupt practices.

Pict. 1

Beside this, public sector internal auditors must immediately inform the head of the central executive body (its territorial authority and public institutions) about the signs of fraud, corruption or misuse of budgetary funds, abuse of authority and other violations of financial and budgetary discipline that led to losses, and must recommend necessary measures concerning:

Based on the practice of internal auditing, we can identify the next five main areas of military activity, which are the most vulnerable to violations with signs of possible corruption:

  • Procurement / acquisition of goods, works, and services
  • Allowance / salary for military / civilian personnel
  • Providing resources
  • Disposal / sale of military assets
  • Using of military assets.

According to the results of analysis of the current practice of internal audit, we can identify the main risks, possible corruption component and the consequences of improper activities in each of the above areas of activity.

It should be noted that the main purpose of this article is to show the basic indicators (so-called ‘red flags’, which point the auditor to the possibility of the existence of violations with signs of corruption).

  1. Procurement of goods, works, and services (GWS) for military

The main risks

  • procurement of GWS:
  • without proper justification of necessity (purchase without justification of real needs)
  • at inflated prices from middlemen (including splitting procurements below key thresholds to avoid stronger tender procedures)
  • of poor quality and with no/unsuitable guarantee
  • predetermining the specification of requirement(s) to favor a particular seller or to prevent other sellers with diverse propositions of GWS from competing.

Possible corruption component: collusion between officials (who are responsible for the procurement of GWS) and the seller with the aim of receiving unlawful benefit (bribes, expensive gifts, hospitality, etc.) through supplying poor quality GWS for military at inflated prices.

The main consequences

  • ineffective and inefficient spending of budget money for purchasing unnecessary GWS
  • excessive spending of budget money for purchasing of GWS at inflated prices
  • lack of money for the necessary needs of the Armed Forces.

‘Red flags’

  • failure to advertise the request for bids or proposals in common-accessible resources and media
  • unreasonable prequalification procedures that exclude qualified bidders, or which allow unqualified bidders to compete
  • unreasonably narrow contract specifications that favor winning by a particular bidder and which exclude others
  • disqualification of bidders for arbitrary or trivial reasons during bid evaluation
  • splitting purchases to avoid necessary procurement procedures and controls
  • pressure by project officials on contractors to select a particular subcontractor or agent
  • contractor engages a questionable subcontractor or local agent
  1. Allowance / salary for military / civilian personnel

The main risks

  • unlawful allowances (receiving allowance without entitlement, double allowance, etc.)
  • unlawful writing-off of distributed funds through overstatement of the total actual amount distributed
  • incorrect application of disciplinary penalties with the aim to deprive individuals of additional remuneration.

Possible corruption component: collusion between:

  • financial officials and military personnel with the intent to split unlawfully allocated allowances
  • military commander and subordinated officer to avoid disciplinary penalties in exchange for unlawful benefits

The main consequences

  • excessive spending of budget money
  • decrease in morale
  • poor discipline

‘Red flags’

  • poor quality or incomplete accounting
  • lack of supporting documents
  • falsified documents
  • destruction of accounting documents before the deadline
  • unit requests for monetary allowance in excess of estimates / known unit size
  • numerous complaints from military personnel about unreasonable disciplinary penalties
  1. Providing resources

The main risks

  • poor quality services in providing food for soldiers (including replacement of products with lower quality substitutes)
  • unlawful writing-off of foodstuff through overestimated number of soldiers
  • unlawful writing-off of military assets (including humanitarian aid)

Possible corruption component:

  • collusion between officials and sellers of food provisions with the aim of receiving unlawful benefit through supplying of poor quality food services for the military at inflated cost
  • unlawful appropriation of unlawfully written-off material values

The main consequences

  • incomplete and poor-quality resources provided
  • negative impact for result of operations
  • decreased morale
  • poor discipline
  • bad health issues

‘Red flags’

  • numerous complaints from military personnel about poor quality of resources (such as in providing food or supplying uniforms)
  • unit requests for resources in excess of estimated requirement / unit size
  • lack of accounting and supporting documents about humanitarian aid
  • lack of supporting documents about writing-off of military assets
  • unusual levels of military assets being written off
  1. Disposal / sale of military assets

The main risks

Disposal / sale of military assets:

  • that are still required for use in Armed Forces
  • at a price that is below existing actual market demand
  • without compliance with existing tender procedures

Possible corruption component: collusion between officials and potential buyer with the intent of receiving an unlawful benefit through disposal of necessary military assets at a minimum possible price

The main consequences

  • shortfall in the budget revenues (the necessary amount of income) and, as a result, lack of money for essential needs
  • deficiency in necessary military assets for the Armed Forces

‘Red flags’

  • addition of new / in-service military assets to disposal list
  • lack of an independent expert evaluation of military assets before their disposal
  • stated value of military assets in official accounting documents is extremely below of true market value
  1. Using of military assets

The main risks

  • providing individuals / entities with favorable prices for the use of military assets (low-price rent, payment for land, etc.)
  • unlawful use of military assets (for free / without any payment) by commercial structures

Possible corruption component: collusion between officials and commercial entities for private use of military assets for unreasonable low price / unlawful free use with the aim of receiving of unlawful benefits

The main consequences

  • shortfall of the budget revenues (the necessary amount of income) and, as a result, lack of money for essential needs
  • use of military assets contrary to their intended purpose

‘Red flags’

  • clear difference between the price of the use of military assets, specified in the relevant contract, and the actual market price of such use
  • presence of non-military property (private equipment, vehicles etc.) on the military territory / unjustified absence of military assets on the military territory

If auditors recognize such signs of activity that may be associated with corruption during the execution of their direct duties, they must take all necessary measures to:

  • identify all corresponding risks
  • assess them for likelihood / probability and their impact on results of military activity
  • make propositions and recommendations on appropriate steps for managing these risks in order to reduce their harmful effect.

The ability of the internal auditor to correctly identify and assess the risks and to formulate clear recommendations to reduce them is one of the most important factors in the success of the internal audit.

That, in turn, contributes to compliance with the principles of effectiveness, efficiency, and economy in the allocation of military resources in order to achieve the main goal of the Armed Forces, namely to ensure the country’s defense and border integrity.


 

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