5 ways to identify and manage ethical risk

What is ethical risk?

Ethical risk in procurement can include conflict of interest, fraud, corruption, and anything that prevents progress with regards to social, environmental, and economic outcomes. Managing ethical risk can be difficult within procurement and supply as supply chains are often complex, making it much more difficult to manage and control what everyone is doing. Procurement and supply professionals should always:

How do you identify ethical risk?

Ethical risk can happen in all areas of the procurement cycle but knowing how to identify them in the first place is important. Take a look at some potential areas of risks that can happen within the procurement process.

• Specifications: Specifications can be written to favour a particular supplier which means other suppliers will not get an equal chance
• Supplier evaluation: Changing the evaluation criteria after the offers have come in to favour a supplier
• Negotiations: Giving your favoured supplier useful information in time for negotiations
• Products: Allowing unsatisfactory goods go through to the customer, even when they don’t meet requirements
• Invoicing: If someone is overcharging or backdating orders to benefit from recent price changes

There are also some warning signs that will indicate potential unethical practices which could include:

How do you manage ethical risk?

As ethical risk is often hard to spot, it’s important to have processes in place that will help mitigate ethical risk in the first place. Here are a few things that you could consider implementing within your overall risk strategy.

• Management: Setting a good example with high standards of integrity from top level management will help the rest of the organisation to follow. Management should be responsible for correct behaviour and instil it across the whole organisation.
• Code of ethics: All organisations should have a code of ethics readily available for staff to access. The code of ethics will clearly lay out what is and isn’t acceptable within the organisation
• Organisation tactics: Organisations should have set procedures in place to help mitigate ethical risk. These should be pre-employment screening, protection of information, data security standards and incident reporting.
• Supplier evaluations: Identify specific high risks in the supply chain: e.g., risks associated with specific countries, human rights abuses, or production processes where your supplier is based.
• Analysis: Conduct initial analysis of working conditions in supply chain: this can be done through supplier visits, questionnaires, and investigation by NGOs (non-government organisations).
• Duties: Staff’s duties should be easily defined, with no one person having the authority to do multiple things. For example, no one person should have the authority to budget, order and pay suppliers. Split this into multiple stages, with a different person having the responsibility at each stage, to help prevent fraud.