Beware of too much jargon
I have two daughters, one who is 22 and the other 25. I love them dearly, but they are, in many ways, creatures from another planet. Their use of technology, language and overwhelming fascination with Love Island creates a barrier which I will never be able to cross. When my youngest expressed her distress as the Love Island villa finally shut its doors after eight, long weeks of “cracking on”, “mugging off”, “pieing” and “doing bits”, and I had literally no idea what she was talking about, I knew all was lost.
In my experience, the world of cost assurance and audit can be a bit like this. Are words like “metrics”, “enablers” and “drivers” really necessary? They are often symptoms of an overly complicated approach which can create barriers to understanding and lead ultimately to additional costs and no tangible added value.
The benefits of cost assurance
Cost assurance or verification is a vital element in any cost reimbursable contract arrangement. You need to know that costs are charged in line with the contract and that they are free from any accounting and arithmetical errors.
Not all providers (whether internal or external) of cost verification services are the same however, and we have seen many examples of weak providers.
Where this is the case the risks are that:
- Issues and problems relating to over-charging may simply be missed. Equally, opportunities to develop more robust commercial processes and enhanced contract t’s and c’s may be overlooked
- Inappropriate and inflated audit “findings” can be tabled, creating mistrust and damage to relationships. Much client management time will be wasted as a result trying to repair the damage caused
- Contractor’s time may be wasted (taking their eyes off delivering the Contract)
- Money is wasted on ineffective audit
This can result in unpleasant commercial surprises for your organisation and questions over the effectiveness of internal control.
To avoid these risks there are some basic questions you can ask
1. Have the objectives of your cost verification team been set with due thought?
We see many examples where client, procurement or project teams have bought in (or developed internally) cost verification services as a knee jerk reaction to a project over-spending. Needs are often poorly thought through and we often see audits taking place which are overly complex and expensive, desperately looking to recover cash and apportion blame on the contractor.
We can help set audit strategies which are pragmatic and cost effective. We can also advise on precisely when and where you should be auditing. We know what works well on Mega Projects, integrating cost verification activities at both programme and project level.
2. Are the auditors qualified and experienced in financial audit? What professional audit standards are they working to?
There are rules which govern audit and assurance. They cover, for example, what is sufficient and reliable audit evidence on which to base an opinion and how to test for the misstatement of costs. These rules are contained in International Audit Standards and an effective audit of costs relies on the auditors understanding them.
NB. Quantity surveyors, engineers, lawyers and project managers can add huge value to major programmes, but they are not qualified auditors. Using trained and experienced auditors will give you robust and reliable assurance over costs.
3. Is the provider independent?
To provide robust, meaningful audit which gives clients cost confidence the provider should be independent of any of the parties involved. Credible cost assurance relies on the person providing the opinion to be free, and to be seen to be free of anything which might compromise their ability to tell it like it is.
4. Does the provider have a formal, documented, risk based methodology?
To ensure consistency, there should be a formal, documented risk based methodology which auditors follow. It should demonstrate how the audit work is planned, delivered, recorded, reviewed and reported on. The most robust approach is that set out in the International Auditing Standards which set out best practice recognised throughout the world.
This ensures resources are prioritised on reviewing areas with the most significant risks to the contract or project. The success of this depends upon identifying the correct risk areas to review from the start. To be meaningful this can often include a review of the contractors accounting system and an in-depth analysis of transactions taken from their accounting systems as well as a review of the contract and structured interviews with stakeholders.
If your providers methodology does not meet these standards you may be unwise to place a high degree of reliance on the findings.
5. How does the provider capture and use knowledge?
An efficient and effective cost verification review will draw on an organisations previous experience and on successful and innovative audit approaches.
George Bernard Shaw said that “success does not consist in never making mistakes but in never making the same one a second time”. I don’t think he was talking about cost assurance, but he could have been.
6. What IT tools does the provider use?
The use of forensic IT tools on its own doesn’t guarantee success. If they are not used in line with a formal methodology they create, “fishing expeditions” which are time consuming and unlikely to uncover all the potential issues. To handle the large datasets generated by cost reimbursable and target cost arrangements, however they are vital.
As a final couple of thoughts and in honour of my daughters; don’t be “haters” because this advice is “sick” … and fingers crossed Dani will marry Jack next year and Megan will join the cast of TOWIE.