Calvetti Ferguson

The Need is Now

September 16th, 2015: The Need is Now by Manish Seth, Calvetti Ferguson Audit Partner

As the economy appears to be headed for a slowdown once again, businesses and individuals alike should be prepared for a range of far-reaching effects. Each will need to tighten their belts, save revenue, and cut expenses if they are to maintain profitability. Companies will undoubtedly do this by implementing cost-savings plans and so employees should expect to see decreases in project expenditures, hiring, annual bonuses, and even potentially increases in layoffs. Slowdowns can also have an often overlooked effect; however, an increased risk of fraud which necessitates an increased need for a prepared, knowledgeable internal auditing department.

The goal of an internal audit department is to improve risk management and processes while reducing costs. They accomplish this by evaluating and improving the adequacy of internal controls, verifying that proper asset safeguards are in place, and investigating reported occurrences of fraud. An internal audit team must be diligent in understanding an organization in order to properly prepare a strong fraud prevention program. Achieving this goal is a significant undertaking during good times and can seem even more daunting during an economic slowdown. This is why it is imperative to have a strategic plan in place to handle such situations when they arise.

One part of a successful strategic economic slowdown management plan is to have the internal auditors assess how various cost-saving initiatives may effect and damage the control environment. Layoffs, for example, may result in the termination of personnel responsible for managing key control functions within an organization. As tasks are reassigned, companies must focus attention on preserving segregation of duties as well as determining if employees are overburdened by these new tasks. According to Paul Sobel, the Institute of Internal Auditors Chairman, as “employees start to feel overburdened, they may take shortcuts or skip certain key controls.” A new risk assessment should be conducted in divisions affected by these initiatives. This allows internal auditors to monitor high-risk areas while gauging the impact on internal controls and employee satisfaction.

Another internal audit function can be to validate the contractual relationships of a company. Contractual relationships can result in reduced costs and an increase in competitiveness which can align with a business’ cost-saving plan, especially during a slowdown. However, these potential benefits must be weighed against the resulting increase in risk. Internal audit teams can accomplish this by auditing the accounting policies for each vendor using records contained on the vendor master file. Auditing the master file for any duplicate vendor entries can help prevent the risk of increased costs due to duplicate invoices and overpayments. By assessing each vendor’s invoices, the internal auditor is able to make sure costs and vendor charges are adhering to the contractual agreement. Also, reassessing vendors can lead to potential consolidation of vendors with comparative products at a competitive price. This has the potential not only to decrease exposure to risk by reducing the number of vendors a business deals with, but also to decrease cost when negotiating new contracts to maximize volume discounts.

Not all companies have an internal audit function that can look at key risk areas. Where this is the case, it can be cost effective to outsource the function. An outsourced audit team can work with management to review the risk factors and focus on the key risk areas. To further reduce cost, the company can choose to focus on and evaluate those areas identified as highest risk.

As the economy changes, so too does the risk environment of an organization. In slow economic times, reevaluating high-risk control areas is imperative to counter the increased risk of fraud. However, companies must always consider cost efficiency when refocusing an audit plan. Concentrating time and resources on audits of high-risk areas is an efficient way to minimize costs while still adequately managing risk. Reevaluation of existing vendors can assess if vendors are adhering to contractual agreements and potentially provide new cost saving contracts. Finally, the continual presence of internal auditors, whether permanent employees or outsourced, creates the impression that fraudulent activity is more likely to be discovered which itself decreases the instances of fraud. While the focus is understandably on reduction of costs during hard economic times, a business will benefit from understanding and placing priority in an internal audit department.

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