Benchmarking construction arrangements in Internal Audit (and my garden shed)

My garden shed

My old garden shed was falling to pieces and so I decided to knock it down and replace it. Having worked in construction (as an auditor) for more than 10 years and never built anything, I thought it would be a good opportunity to erect the shed myself.  I looked on line and ordered a simple but sturdy looking shed.

In my naivety I had expected to receive four walls a floor and a roof, and to have to screw them all together. In actual fact when it arrived, the delivery man spent a good 10 minutes offloading a bewildering assortment of planks, boards, wall panels and a sack of screws and nails which weighed as much as something fairly heavy.

The instructions were quite impenetrable but, worst of all, they missed one critical ingredient: a proper picture of what the shed should look like when it was finished.  I had nothing to refer to, no benchmark.  When I wasn’t sure I guessed which resulted in me having to undo and redo on a number of occasions.  After two days, I finally got there and have very nice looking shed.  (I am, however slightly nervous of any future high winds or torrential downpours!)

Audit benchmarks

Audit is also all about having a benchmark. It’s about knowing what “it” should look like, and comparing “it” to what is actually happening.

Some benchmarks are very clear:

  • The Companies Act and GAAP form the benchmark for statutory audit
  • Contract audit uses the terms of the agreement as a benchmark
  • Quality assurance audit uses written down procedures as a benchmark to test compliance

Some benchmarks rely on best practice or guidance from corporate governance rules. What constitutes an effective system of internal controls will differ from organisation to organisation and reflect the board’s risk appetite.  It is likely that an effective system of internal controls will, however, include items such as an appropriate segregation of duties; clear and enforced delegated authorities and a proper understanding and assessment of risk.

The most difficult benchmark for an internal auditor to apply is the wider understanding of what is going on in other organisations. It might all look fine until you realise that other organisations place no reliance on a particular set of internal controls or that a particular supplier or business partner has suffered internal control breakdowns, or worse, has deliberately misled.

The way to deal with this last, most difficult benchmarking issue is to bring in a third party with wider experience. In a previous life, as an internal audit manager, I have successfully used experts in diverse areas such as, treasury, fraud management, car parking, petrol stations and mechanical engineering.  Construction is another area where, I believe third party experience is important.

Benchmarks in internal audits of construction projects

When carrying out an internal audit of your organisation’s construction activity there are a number of areas where independent and expert support could add significant weight to the assurance which you can provide. Some examples of where a benchmark of knowing what to expect is valuable are:

  • The quality and clarity of the brief. Where projects are started in a hurry with incomplete designs and loose cost estimates, cost control can be very challenging.
  • The form of contract. Construction projects are traditionally let on a fixed cost, lump sum basis, but other types of arrangements, such as target cost contracts could reduce costs and improve control.
  • Commercial management. Almost universally, organisations rely on large firms of Quantity Surveyors and Engineers to manage their construction costs. Under any form of cost reimbursable contract arrangements, however, these firms do not bring the appropriate audit skills.
  • Claims and disputes. Where these happen, it is an indicator that internal controls have broken down or that contracts were unsustainable.

By working with an expert third party you can gain a better understanding of risk, the effectiveness of internal controls and governance arrangements. When the metaphorical high winds and torrential downpours occur, which in construction they inevitable do, the robustness of your assurance will stand up to the test.  Unlike, I fear, my shed.