How would a sales manager fare at their company if they promised to deliver 100% of the goods months before actual distribution, repeated this promise one month before delivery, and then informed the customer one week in advance of the actual delivery that he will only deliver 40-50% of the promised quantity?
What would it be like for a CEO who promises to deliver in November and then admits at the end of January - a week before delivery - that they are nowhere near delivering on this promise? How would a company fare that implements a risk management system that would allow their sales manager and CEO to make such miscalculations?
On the other hand, how would a purchase manager fare who enters into a contract with a seller who turns out to be unable to deliver, when alternative suppliers are available? How would the legal department of that company fare if it turns out that the contract hardly obliges the seller to deliver products in the promised quantities?
If these organisations were to work under perfect competition, these people would be subject to disciplinary action, and if the mistake hit core business, the business would lose customers and potentially enter a phase of serious financial distress. Trust is hard to gain but easy to lose. But in the absence of competition, incompetence thrives.
So, with news breaking that the European Commission may not renew COVID vaccine contracts with AstraZeneca and Johnson & Johnson beyond their current expiry dates, who is to blame for the current issues with vaccine rollout in Europe?
AstraZeneca has to defend itself on three fronts: the effect of their vaccine, their poor communication and their lagging production. Particularly on the last point, there seems to be a serious planning problem: there was no backup to deal with a possible setback in production. In that context, it is not uncommon to cover the risk of production setbacks by reserving production capacity or by taking capacity from third parties as an option. These planning problems constitute 'significant risks', which must be included in the management letter.
Unfortunately, the EU has also made mistakes. Firstly, the EU has negotiated prices. In this case, one cannot have worked according to the public tender regime, because the EU had to negotiate with one supplier at the time. This has not stopped the EU from negotiating extensively on the price, while other countries (including the UK) cut out lengthy negotiations to increase the likelihood of on-time delivery.
A total of 2.3 billion doses have been ordered, enough to vaccinate the entire EU population twice. EU contracts were signed with AstraZeneca (400 million doses), Sanofi-GSK (300 million doses), Johnson & Johnson (400 million doses), BioNTech-Pfizer (600 million doses), CureVac (405 million doses) and Moderna (160 million doses). The Commission has concluded exploratory talks with the pharmaceutical company Novavax with a view to purchasing up to 200 million doses and with Valneva for up to 60 million doses.
But delivery is not only uncertain for the vaccine delivered by AstraZeneca. For example, the vaccines produced at Janssen Vaccines & Prevention (a fully owned subsidiary of Johnson & Johnson) in Leiden are bottled in the US. The question then is whether this production will return to the EU. Furthermore, it is not certain that all manufacturers get their vaccines approved. In that regard, Canada has made a safer choice, ordering enough doses from each manufacturer to vaccinate the entire population. This planning is all the more advisable because the economic damage far exceeds the few hundred dollars per capita these doses cost. At this moment the EMA approved four vaccines: Biontech. AstraZeneca, Johnson and Johnson and Moderna.
The mistake of the EU is that it did not account for this subordination of its deliveries nor did it account for potential problems after the vaccines had been approved. In other words, compared to Canada, the USA, Israel and Canada, the EU has not been able to make as adequate a risk analysis, let alone act on it. The EU has negotiated the price of the vaccines, while it has been assumed that all production agreements would be met: as the old saying goes, penny-wise and pound-foolish.
The cost of the EU’s planning errors is many times more expensive than the costs of the mistakes made at AstraZeneca. Significant risks have simply been missed. In the meantime, let's hope that the remaining manufacturers have smaller production problems than AstraZeneca and that the EU can appoint competent negotiators.
The auditor of AstraZeneca will discuss the risks in the company’s management letter, which means that AstraZeneca will have to take measures to improve its planning skills. However, this management letter is absent for the EU – perhaps it shouldn’t be?
The contents of this opinion piece are views of the author and do not reflect the views of ICAEW as an organisation.
Jan Bouwens is Professor of Accounting at the Amsterdam Business School of the University of Amsterdam, a research fellow at the Judge Business School of the University of Cambridge and Managing Director of the Foundation for Auditing Research, The Netherlands.