Audit of Cartel Formation in Ordnance Factories What

Audit of Cartel Formation in Ordnance Factories

What is cartel n n A combination of independent business organizations formed to regulate production, pricing, and marketing of goods by the members or a group of parties, factions united in a common cause or consortium of independent organizations formed to limit competition by controlling the production and distribution of a product or service; "they set up the trust in the hope of gaining a monopoly".

Cartel in Ordnance Factory Organization n n During audit of supply order, it is found that Ordnance factories are procuring material from the third parties at a more price than the last purchase price. It is happening due to less competition also party is holding the key for price and supply of the material taking production of ordnance factories into uncertain.

reasons n n There is a tendency in some factories to go in for limited tenders for high value works. The reasons given for this are, either that the work has to be completed in a very short time or that the firms known for carrying out a particular work are very few in number. In the process, the competition is restricted which in turn results in cartel formation, higher rates and favoritism to select firms. Due to non observance of prescribed registration procedure for enlisting/registering suppliers with Ordnance Factory is also another cause of cartel formation.

n n n It was found that the approved contractors had not even bothered to respond or to send a regret letter which established that they were either no longer interested in dealing with the organization or had formed a cartel to divide different works of the said organization among themselves. Ironically, the ‘approved contractors’ list had been formed a long time back and had not been updated for years - giving credence to the cartel theory. At times, even in cases where advertised/global tender notices are issued, the same are published in ‘local’ dailies and not in any national newspaper. Surprisingly, in some cases, the notice was published only in the ‘evening’ newspapers. There are cases of the tender notice being published in a leading national newspaper but not on the page dedicated to the advertisements for tenders, thus partly restricting the competition and defeating the purpose of issuing advertised tenders

methodology n n Select high value supply orders valuing more than 20 lakh placed by the factory management during the year 2009 -10 and 2010 -11. The above can be available from the copy available at your office or ask for a detailed list of supply order from the factory management and select ten to twenty supply orders and exclude high values Supply Order of procurement of HSD, furnace Oil which procured through DGSD rate contract and also procurement from some PSUs. After selection of the supply order asks the provisioning section of the factory to forward the supply order case files for audit verification.

n n n On receipt of the same, verify the store holder inability sheet (SHIS), material planning sheet (MPS) etc. regarding the quantity of procurement as presented in last workshop. If any discrepancy found there, which leads to over provisioning may be questioned by audit. Minute study may be carried out for the tender procedure and vendor selection. After vetting of MPS & SHIS, a tender purchase committee formed to select vendor and to decide the mode of tendering with finance representative as a member of the TPC as per the delegation of finance power of OFB. Tender enquiries made either by open tender enquiry, limited tender enquiry or limited tender enquiry i. e. ab-initio single tender.

OPEN TENDER ENQUIRY n n n In case of open tender enquiry verification may be carried out, whether expression of interest/tender notice has been published in news papers (main news paper) having wide publication. Some times open tender enquiry made by the evening edition of the news paper for less competition. To know the wide publicity of the tender enquiry paper cut or bills for the advertisement can be asked for audit verifications. Whether sufficient time has been given for submission of quotation in the enquiry may be verified (minimum 3 weeks).

n n For participation in open tender the firm has to purchase tender paper from the factory. Some times it is found that the representative of one firm receive tender form for more than one parties. It can be highlighted on checking of the document for issue of tender paper, where the representatives of the firms sign the documents. Careful scrutiny should be carried out to check the IPOS, demand draft etc. though which firm paying for tender paper fees, some times the draft were issued from one bank on a particular date, having consecutive serial nos even though the firms are different. Similar scrutiny should be made in case of IPOs also on verification of serial Nos of IPOS. Even date of IPOs, can be verified whether the IPOS purchased after issue of tender notice or not.

n n It also came to the notice of audit that quotation of different firms has been dispatched to factory from one post office in a particular time, from a particular post office. It can be verified from the details stamps dispatched made in the envelope by the postal Deptt, whether name of the post office, time of dispatch & date of dispatch. During audit of supply order it can be came to notice that the printing mode, format of the quotation, wording etc are very much similar with each other. It can also be checked regarding the telephone No. Fax No. etc. used by the different firms. Sometimes it is found that either fax & telephone no of different firms are same, which implies that different firms having single owner. Any other point to find the cartel may be carried out besides the above.

LIMITED TENDERENQUIRY q q q Verify the reason for LTE. Verify the mode of selection of vendor. As per the procedure factory has to issue tender enquiry to the registered firms. But it is often found that firm issued tender paper to some established vendors also. Mode of selection of vendors can be questioned in audit. Verify the no. of vendors to whom tender enquiry issued. If the numbers is less than six the same can be objected if anything has not been mentioned in the TPC minutes. As per the laid down rule in Procurement manual limited enquiry to be issued to minimum 6 firms and maximum 15 firms including last suppliers also.

q q The address to which the tender enquiry made may be verified. It may happen that different firms having some address & Fax No has been tender enquiry. Some times certain factories issued tender enquiry through fax and ask for the quotation through fax also. However, the reason for above mode of tender enquiry should be expressly mentioned in the TPC minutes. If the same has not been done in the TPC minutes queries may be made. Further to this, it may be verified whether original quotation has been received from the firm within 15 days or not. Some internal audit offices highlighted that fax enquiry made by factory to different three firms by sending the enquiry to a particular fax No. same could not be ignored in other ordnance factories also. This is considered as cartel formation under direct supervision of TPC/Factory management. Verification should also be carried out regarding similar type of printing in quotation, telephone fax & address should be verified to establish the different firm and one owner.

q q In most of the case in limited tender enquiry, it is found that out of the total number of firms to whom tender enquiry made either not submitting/participating in the tender or giving regret letter or not submitting the requisite papers like EMD required for the quotation, resulting their participation cancelled and make the competition to minimum and the firms detect their term with the factory. In this connection queries may be made, what action has been taken by the factory management against the firms (established/ registered). Whether vendor rating has been updated accordingly or not.

If it is established that there is any cartel formation that one owner having many firms or firms make ring, following audit review may be carried out:

q q q Ask the management whether above irregularities have been noticed at the time of vendor selections, tender enquiry and placing supply order. Verify the present rate of the store with the last purchase rate of the item. Calculate the price verification if the same is more or exorbitantly more in comparison to the last one, calculate the loss by deducting last purchase rate from the present price for the total quantity. Resultant amount is considered as loss and ask for the regularization of loss. Some times it is found that different firms quote the same rate for particular items for which factory management place supply order among the parties equally or as per the past performance. Verify whether above action has been taken properly or not.

Some times above types of ring formed by the firms to avoid the excise duty etc. To establish the irregularity documents relating to supply or the material i. e. MIS, IGP etc. may be verified, so the transport used by them may be the vital information. Some times one single transport has been used by the different firms of above category for supply of material. This can be questioned for clarification. q Data to be forwarded to CIA(OFs) after raising objection in the prescribed format. q Beside that any irregularity came to the notice of audit may be highlighted in audit. Note: For Govt order on Cartel formation please refer para 4. 19 and annexure-4 referred in Para 4. 19 in MM Hand Book 2010. q n

Procurement through Single Known Source n During audit of supply order in ordnance factories, it has been pointed out by some of the Internal Audit Office that factory management is procuring stores and equipments through single known source approved by General Manager. MOD GOI letter no 5(12)/99/D(Prod)/B dated 30. 04. 2010 is enclosed for the rule position on this issue

Method of auditing supply order for procurement of stores/equipments from single known source

n n For audit of the above type cases, ask for the supply order case files related to the single known sources from the factory management during last 2 financial years(restrict the value of supply order from 10 lakh and above) During audit of supply order for procurement of items from single known source, audit should verify whether factory management is following above Govt order for the supply orders placed after issue of the letter.

n n It is found that factory management is procuring stores from a single known source time and again, without exploring the possibility of any competition. Even some time for first time procurement also factory management is resorting to single known source. However, it is found that similar type of item/stores are available by other manufactures/ suppliers(except OEM). For audit of the same, audit office could verify the availability of the item in market from the web site named a INDIAN INDUSTRY. From this web site if item name will be put on, the any one can find the list of probable suppliers. After getting the same, matter can be challenged in audit. In some ordnance factories it is also found that though the item has been procured from different firms, to benefit a particular firm factory management is going for single tender with the approval General Manager. It could be questioned in audit. Any other point to the above if audit could find can be highlighted in the form of objection

Case study-1 n n n During supply order audit in MSF, a case came to the notice that factory management is procuring a split ac by preparing two new item justification as indoor unit and outdoor unit. On verification it is found that the quotation forwarded by a firm is giving the leaflet of a split ac, however he is quoting for two item as indoor unit and outdoor unit. Similarly other firms are also quoting as indoor unit and outdoor unit. Which is considered as a cartel formation between firm and factory for the product as no item as indoor unit and out unit exists in the electrical items. Further to this, the item is procured for some production section, which is meant for cooling of some machinery and items. However, split ac’s are not having same feature to cool the heavy machines.

n n This case came to the notice during audit of meter, fan and ac register of the factory. As factory fail to produce the ac register to audit, this office carried out audit of electric godown of store section. On verification it is found that no bin card bearing nomenclature of ac/split ac found in the electrical store. As this items came to the notice, the store keeper fail to reply the audit query regarding indoor unit and outdoor unit. After verification of bin card, demand note and receipt voucher this office ask for supply order and found serious irregularities like procurement of ac from 806/01, splitting of case many more.

Case study-2 n n During audit of a particular case file it is found 3 firms approaching general manager OF, Bolangir for a particular tender enquiry through fax. With their application for tender they are enclosing the letter of intents received from OF Chanda for a particular product. On verification it is found that all the 3 firms m/s Bhola Engg, Anil Package and SP Timber Industries approaching for tender made the fax from a single number I, e 01732 -251970, which is belongs to M/s SP Timber Industries, which implies that all these three firms belongs to one owner or they form a cartel.

Thank you y: b d te n e es ce i f f it O d u re A o l p a rn ha Inte SF Is M Pr