How robust is your financial due diligence of suppliers?

9 January 2013
Stephen Ashcroft - January 2013Are you are going to monitor suppliers’ financial positions more diligently in 2013? Knowing the position at the time of annual reports is no longer enough, given the incidence of financial failures. Should it not be a strategic role for procurement to undertake detailed monitoring of a supplier’s finances – demanding commercial acumen, not just reading a profit and loss statement and balance sheet? It is pertinent to read the judgment in a legal dispute between the Hackney Empire theatre in London and Aviva Insurance from 2011. It is a complex case regarding the provision of a bond, which secured the due performance of obligations under a contract. The Hackney Empire paid two instalments of £500,000 and £250,000. The contractor hired to do the work, Sunley Turriff Construction, went into administration after the payments were made. The judgment involved cross-examination of Hackney Empire representatives regarding the contractor’s financial position, which included the following exchange: Q. Well, you knew, didn’t you, at the time that you were making these payments that you were making it to a contractor who was financially in dire straits because they were not able to pay their debts as they arose? A. That's going a little further than I would, sir. I knew they had financial challenges. I wouldn't have said they were in dire straits, but certainly we knew they had issues. Q. If they couldn't pay their sub-contractors, they couldn't pay their debts as they arose, could they? A. Sir, it could be that they couldn't fail but they were reluctant to pay. We didn't know whether they were simply being dishonest, if you wish, rather than simply unable to pay. We didn't know which was which. Q. You took no steps to discover what their true financial position was did you? A. The only steps we could take were looking at their accounts, which we did and we tracked but in terms of published accounts there is such a historic record that they are not very useful on a position that's changing quite frequently. Q. The published accounts which you looked at were in 2000? [SM note: the money was paid to the contractor between 2002 and 2003] A. Yes, exactly. Q. You knew when you looked at those that there was a real risk of deterioration since then didn't you? A. No, sir. Reading this judgement is strongly recommended, as it contains salutary lessons on assessing the financial due diligence of your suppliers in the year ahead. Happy new year. ☛ Stephen Ashcroft is a business consultant at Brian Farrington
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