Conducting an Effective Procurement Process Audit

Many clients bring me in to audit their expenses and identify inefficiencies in their procurement and Accounts Payable processes. Generally, a procurement process involves the following factors:

  • Current business need to purchase raw materials and supplies
  • Vendor research and price comparison, including the development of a quality plan
  • Approving the vendor and authorizing the purchase
  • Purchasing the needed items
  • Receiving an invoice
  • Delivery of goods
  • Inspection of goods before using (random sampling)
  • Paying the supplier after quality, delivery and contract agreements have been met

From my experience, errors and waste start to creep up during the Sourcing stage as many Procurement Managers are focused on price per unit instead of the total cost. This is never the best course of action because these vendors will have to recover their costs by lowering quality, not delivering on time, et cetera. It is imperative that when conducting a procurement process audit you use random sampling to analyze purchase orders, invoices and contract agreements to ensure quantity, item description, prices, discounts and any other relative information matches. Sometimes a third party may be liable for the payment of the purchase and it was paid by the company instead which results in an unnecessary expense.

In addition, the company may have entered into a contract agreement with a freight carrier that states a guaranteed delivery, if this is not being met then the company is not liable to remit any payment.

In regards to vendors, it is also imperative that you familiarize yourself with the company’s internal controls for approved vendors. You should audit their vendor profile database in their accounting software to ensure they are legitimate and compare addresses with employee addresses to detect fraud. You should also ensure early pay discounts are being taken advantage of and that the correct discount is being applied.

It is also important to actually view the process in action and write notes about what you see. You should also speak with the employees who actually performing the activities in the process to truly understand bottlenecks and pains. After you gather this information, you should collaborate with them to create a process map to further detect inefficiencies and improve the process.

Further reading on reducing procurement costs:

How to stop freight charges from eating away at profits

Price Focused Sourcing is bad for Business

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IT Asset Management Checklist

It is important that you are periodically auditing and logging critical IT assets for the purpose of minimizing security, conduct and financial risks. Below I have noted the most important assets that should be properly logged and have auditable documentation.

IT ASSET MANAGEMENT CHECKLIST:

  1. Hardware and Software
    • computer user, UPC, location, model number, et cetera
  2. Network and communications infrastructure, servers and apps
  3. Alarm systems
  4. Telephone circuits
  5. Vendors and Service Providers
  6. Licenses
  7. Purchase and disposal info
  8. Computer and Laptop software upgrades
  9. List of all apps in laptops or computers for each employee including authorization and security information.
  10. Cloud Data backup hardware (e.g.; external USB drive)

By using this checklist the next time you conduct an IT Asset audit you’ll be able to identify vulnerabilities and exploits that were not previously known to you. For example, let’s say your policy states that there should be 10 laptops kept in the supply room at all times but when you conduct an audit you find only 8 and employees have been careless with the laptop request form. The laptops also have not been entered into the tracking system making matters worse as now you have to dig through invoices to identify the two missing laptop model numbers and SKUs.

An IT Asset Policy is not effective if it is not enforced regularly. Employees must be reminded of them everyday and trained periodically.

 

How to stop Freight Charges from eating away at profits

The shipping and delivery cycle time race amongst valuable brands like Amazon and Walmart is a fierce one. Many parcel companies like UPS and FedEx may offer discounted rates for delivering on time but the real question is, “Are they actually delivering on time?”

By implementing effective visual internal controls, your company’s accounts payable team may be able to identify delivery discrepancies per regular parcel audits and if they are found you are not required to pay them.

Other things to look for while auditing would be:

  • Duplicate Invoices: Parcel vendor may generate duplicate invoices with different purchase order numbers, tracking numbers, invoice numbers, et cetera.
  • Discount Rate Verification: Thorough analysis of the invoice is critical for the purpose of ensuring that the proper discount rate was included.
  • Improper Billings: Sometimes there are multiple parties involved and you could be billed for the shipment when your contract specifically stated that “Vendor XX” was responsible for payment. You should integrate freight audit software into your accounts payable process to mitigate this risk.
  • Rate Verification: Essentially, your accounts payable team should be ensuring that the rate base, math, mileage, product classification and weight all match your purchase order and contract agreement, otherwise you are overpaying.
  • Fuel surcharges: It is important that this charge matches what is in your contract and not the current market rate.

Auditing offers the opportunity to gather critical data, such as, shipping spend by origin, destinations, general ledger codes, customers, fuel charges, vendors and carriers. This data can be used to improve your financial planning and analysis, and offer opportunities to streamline processes and realize cost innovations.

Notable Friday Chat: Fraud Risk Management

Happy Friday! I hope you’ve had a great week. With that said, I want to leave you with a short message about Fraud Risk Management. Until next week, have a wonderful weekend and remember, “Success is continuous improvement”!

 

“To minimize fraud risk, top management must be committed to a Fraud Risk Management program, implement visual controls and employee guides, have clear reporting procedures and whistle-blower protection, have an efficient investigation process, and most importantly, translate policy into daily activities.”

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