Purchasing and Procurement Internal Audit

Purchasing and procurement is an area with high risks for kickbacks, poorly negotiated deals, contract compliance, other contract issues and employee misuse of funds.  Without proper guidelines for employees to follow, such as those found in a Purchasing and Procurement Policy, a company runs the risk of employees becoming creative, resulting in financial losses.  Most companies enhance their control process with a well written Purchasing and Procurement Policy. Many companies tie in two other policies with the Purchasing and Procurement Policy:  1) a Code of Business Conduct or Ethics Policy which addresses an employee duty to work in the best interest of the company and 2) a Travel and Entertainment Policy to address the types of business expenditures that are allowable and the process to account for them. 

We have found companies lacking some of the aforementioned policies and have helped draft policies to fill this void.  A company can reduce business risk by minimizing the opportunity for employees to use bad judgment due to the lack of written guidance. 

Cash disbursements tie directly in with a company’s purchasing policies.  Controls over the vendor master, the bid process and materials management are vital.  Achieving quality standards, quantity discounts, safety stock, secure and low-cost storage/ warehousing are equally important.  Operational and efficiency internal audits can evaluate if these items are being attained.  

Purchasing/Procurement - Is there a bid process on major purchases? Who are the authorized signers? Is there a purchasing department and procurement process? Is there an order requisition process or can anyone order? Does your company have an open PO system to track items not yet received? Decosimo's internal audit professionals can assist your business with setting up processes and internal controls to manage your purchasing and procurement.

Travel and Entertainment Policy - Is there a written travel and entertainment policy?  Is the policy written to comply with current tax laws?  Are the lowest fares and best discounts being obtained?  Does the company use a travel agency? Are National and Corporate accounts utilized to obtain better pricing or larger discounts?  Do employees use a company credit card, floaters, or PCI?  Are there periodic reviews of credit card expenditures?  How does an employee get a company credit card? How are cards handled when an employee leaves the company?  An internal audit will disclose if there are unauthorized cards in existence as well as test if there are unauthorized charges.  We have found many personal expenses on employee expense reports and company credit card invoices.

Property and Equipment - Does your company have an acquisition policy? Disposal policy? Are proceeds received on disposal of assets deposited and recorded with appropriate procedures?  Are vehicles, building plant or other assets adequately insured?  Some companies do not write off assets properly and as a result pay for insurance on assets that no longer exist.  Our internal audit team looks at related accounts for example: How do assets relate to maintenance programs, such as copiers.

Property, Liability and Other Insurance – This area questions the appropriateness and adequacy of your company’s types of insurance. Are you over or under insured?  There is risk for being under insured or a wasting of funds if you are over insured. Are you familiar with general liability, officers and key-man life insurance?  Have you evaluated the insurance on property and equipment compared to their value?  Have you determined if property and equipment are still in the company's possession?  Have you addressed safety issues such as OSHA compliance, if applicable?  Have you addressed quality control issues if you are dealing in products or services that could jeopardize employees or customer’s health and well being?  We reviewed a gas company’s quality control department’s procedures because there was concern about the quality of repair parts being used.  Inferior parts could cause an explosion and fatalities.  For another company, we reviewed the on-the-job injury policy and discovered that the HR Director was approving everything with no negotiating or comparison to norms. Based on our recommendations the company realized an immediate savings of thousands of dollars.  With insurance costs rising, this is an important area to consider. 

Contract Compliance - Do you know if you are in compliance with what you promised your customer?  Does it worry you that they might not renew a contract because of this uncertainty?  Are your vendors in compliance with what you demand from them? Do you have government contracts and are you in compliance?  Contract compliance is important for several reasons:  1) adherence to contracts with your customers will obviously help retain those customers 2) compliance to government contracts will help avoid fines, penalties or worse 3) you don’t want vendors overcharging you.   Not testing for vendor compliance could cost you by not receiving the value of goods and services you paid for and could also increase your business risk such as contractors not being certified, bonded or insured, as most likely required within a contract.  Compliance audits help mitigate the risk in all these circumstances.  Decosimo can evaluate your compliance in a contract by telling you what your score is before the other party gets out their scorecard.  This allows you time to either make improvements or build a defense, depending on the circumstances. 

We Can Help

When you need to verify that your company's purchasing and procurement processes have the appropriate checks and balances, contact Decosimo's internal audit team and ask us how we can help.  

Our internal audit professionals have the experience and credentials to assist you with establishing controls to reduce risk and safeguard your bottom line. There are several different areas within purchasing that can be looked at independently.  We have performed single process audits over the bid process and vendor master controls at a utility company; contract compliance audits at state department of corrections; healthcare providers; public relations firm and several involving construction to mention a few.  Some of these audits only take a week or two and provide a lot of value and insight.

Decosimo’s internal audit team has provided internal audit advisory services to existing internal audit departments of financial institutions, utility and manufacturing companies. Our internal audit team consists of Certified Public Accountants and Certified Fraud Examiners. Our internal audit services management team has over 30 years of experience creating and managing internal audit departments for public and private clients in industries including, manufacturing, retail, energy, healthcare, and the restaurant and entertainment fields. 

To get started, ask about our half day, no charge, “Walk and Talk.”

Examples of Purchasing and Procurement Findings

• Vehicles were placed in service but not recorded on the books of a small company. When the vehicles were properly recorded, the additional depreciation lowered income taxes.
• Disposal of vehicles was never verified by an independent source and vehicles were written off the books but were physically still in use. The main issue was insurance coverage was only provided for assets shown on the books. In addition, because the asset and accumulated depreciation had been removed from the books, there were erroneous calculations of gains and losses on disposal. 
• A physical inspection  of equipment showed why there was an increase in reprints at a photo finish lab. We noted the lack of a routine maintenance program could result not only in lost customers due to poor quality and resulting repints, but also increases repairs and maintenance costs and requires early replacement of equipment. Following a routine maintenance schedule may have decreased repair and maintenance costs and resulted in customer retention.
• Insurance premiums were based on new employees hire date and eligibility date. However, actual coverage did not apply for 60 days. By coordinating employee eligibility date with premium start date, the client stopped paying premiums for those 2 months and received a refund for amounts paid erroneously that year.
• Client engaged us to audit the policies and procedures of a third-party administrator and we discovered savings in over-paid premiums and overcharges in claims.
• A review of the District Manager’s meeting expense reports revealed costs which were not tax deductible.  Out of $44,000 total expenses, $8,000 was questionable. When room charges were not detailed on the employees’ expense report, we obtained a detailed printout from the resort and noted bottles of liquor at $80 apiece and other personal sundry items, including extra nights at the hotel.  As a result of our findings, the company engaged us to help develop a travel and entertainment policy.
• The Director of Maintenance at a large Florida retirement community was in charge of disposing of all the condo contents (furniture etc) when occupants passed away.  There was no disposal policy so the Director decided to personally sell the contents and pocket the funds received.  Needless to say, when we discovered this, a disposal policy was written and enforced.