The Auditor’s Auditor.

Monday, September 2nd, 2013

Who Audits the Auditors?

We have been reading a “Contract Award Manual”. The content relating to procurement begs the question regarding auditor’s competencies to, on an informed basis, audit the specifics of a deal. There is a section on “Negotiation” It states: The auditors review of purchasing procedures should determine whether:

a)      Buyers are required to negotiate separate price breakdowns for significant elements of the purchase (such as facilities, tooling, engineering, set-up, testing, and special packaging) to allow separate cost control of the significant elements.”

The critical reader will immediately focus on the word “whether” The answer is a tick box, Yes or No. Presumably if the answer is No, the auditor will recommend the answer is Yes? Let us assume the answer is affirmative. What then? Is the auditor knowledgeable about supplier pricing decisions to form a view that the request for a price breakdown when the supplier is using penetration pricing, can work to the buyer’s disadvantage?

Will the auditor expect the buyer to prepare a cost breakdown table for completion by tenderers? If the answer is Yes, how will the Auditor decide if the table is sufficiently comprehensive to expose negotiation possibilities. How would they deal with the situation where we found the bidder including a cost for payment of liquidated damages; contingency; negotiating margin and escalation of purchase price (over a Fixed Sum pricing Agreement)?

What would the auditor report, if he found a contract price change request from a Project Management Practice for £450,000, for services not included in their tender? If further information was requested by means of a cost benefit analysis and the reply was that two full-time additional project managers and three full-time administration staff were necessary for the smooth and efficient running of the contract, what would the auditors expect the buyers to do next? Which of the following options, available to the buyer would satisfy the auditor? Answers on a postcard!

  1. Do Nothing
  2. Thank the supplier for their information and agree the uplift not jeopardising the contract performance
  3. Agree to pay £225,000 thereby splitting the difference and being reasonable to protect relations
  4. Refuse to pay the increase requested.
  5. Initiate a searching audit on the tender , using supplier incompetence as the justification
  6. Terminate the contract (for convenience) on the basis that trust has evaporated
  7. Go to the Supplier’s CEO and report the unsatisfactory state of affairs.

The above is a real example of a situation similar to those faced by many buyers, and one would imagine seen by those auditors that delve deep enough to find it.

You may also be interested to read about the recent  CPS Taxi Fraud

We have trained audit teams in the complexities and nuances of purchasing. Contact me Ray Gambell on 01744 20698 or email at r.gambell@brianfarrington.com for help in this area.

 

About Brian Farrington

Brian Farrington is one of the world’s longest established procurement and supply chain consultancy and executive training specialists. 33 of the current FTSE100 have retained our services, as well as leading organisations in the UK, North America, southern Africa and Asia. Established in 1978, we have proven expertise and experience in strategic procurement, sustainability and risk management. Brian Farrington solutions and services are formed through consultancy, training & development, coaching, interim resource and recruitment.

Our four core areas of strategic procurement, sustainability and risk management capability are:

• Strategic review and commercial governance

• Performance delivery and transition

• Major project support including managing contractual risk

• Learning & development in support of organisational aims.