A Hard Look at Soft Controls

A Hard Look at Soft Controls – auditors establish procurement standards

J. Mike Jacka

Procurement specialists receive negotiations guidance, and internal auditors help to establish consistency across a recently merged organization.

FOR SEVERAL YEARS, THE AUDIT department performed traditional reviews of the procurement function. Although the auditors identified some items for improvement each year, they generally found the department’s internal controls to be effective.

By contrast, the auditors found numerous problems during their contractor reviews. They discovered that many contracts were poorly written and that the company was often paying its vendors significantly more than the typical market rate. Although the company obtained fixed bids and selected the lowest bidder, a high volume of change orders was offsetting these efforts.

Clearly, there was a problem. How could the audit reports show that procurement controls were adequate when the results were so poor? All procurement audits were cancelled while the auditors reevaluated their findings.

After careful consideration, the auditors concluded that their review of traditional controls may not have been sufficient and that a rigorous examination of soft controls might be needed. They discussed what they knew about the managers responsible for negotiating contracts and agreed that these individuals probably were not adequately trained. Although the procurement process was sound, those carrying out the process may not have been performing their duties effectively.

The chief audit executive met with the division president to discuss internal auditing’s concerns. The president agreed to support a special project led by internal auditing that would involve all of the senior managers responsible for contract negotiations. The project’s objective would be to assess the experience and training of those responsible for vendor negotiations.

The audit team performed a great deal of research and developed a list of attributes for successful negotiating. The list was reviewed and approved by management, including those in procurement. The auditors then teamed with management and, with assistance from human resources, assessed each business group’s experience and training. Although some of the company’s negotiators were clearly experts, most had little or no training. The results of the assessment were plotted on a grid and reviewed with the division president.

The president asked for action items. Internal auditing again teamed with management to define the need for negotiations training. Human resources’ training department developed a special class, which was previewed and evaluated by the auditors. The line managers were required to assess each individual’s strengths and develop a tailored training plan. The managers also changed the performance appraisal process to include a rating on negotiation skills.

In addition to the company’s lack of negotiating expertise, the project highlighted another problem — years of inexperienced negotiating had led to poor contracts. To address this issue, auditing again teamed with management to capture and review all contracts. Although the review is still in progress, this process will trigger new negotiations and, hopefully much better contracts. The contracts audit group will participate by pre-auditing the vendors and ensuring that the negotiators possess accurate information on the vendors’ actual overhead costs.

Significant savings are expected from this project, amounting to tens of millions of dollars, and perhaps more. In addition, procurement audits now always include consideration of soft controls such as training, workload management, experience, employee turnover, innovation and creativity, and leadership.



A number of Midwestern organizations merged and became a unified, but diversified, full-service organization. After the merger, it soon became apparent that a great disparity existed among the organizations’ methods of operation. In addition, some of the organizations did not maintain documented policies and procedures. To remedy this situation, the company centralized payroll, purchasing, human resources, general accounting, and other similar functions and quickly developed written, standardized methods.

Still, the consolidation of cash handling and record retention efforts continued to cause problems. Most attempts by internal auditing to convince the “right persons” in these areas to develop additional standardized policies and procedures for the new, larger organization were ignored.

The company’s cash handling efforts were disjointed and confusing. Hundreds of cash funds were located in various geographic areas, and there were often several different funds within the same facility. Because of a series of thefts, fraud, and mysterious disappearances of funds, cash handling demanded the promulgation of better safeguards and controls.

Record retention guidelines were also needed. The company maintained records that were no longer required for regulatory or company compliance. As a result, basements and other storage areas were bulging with records dating back many decades.

To meet the company’s need for cash handling and record retention guidance, internal auditing took an active role in the development of the drafts for these two policy topics. Auditing also helped train those who needed the most guidance. The clients provided useful feedback on all the procedural steps, sometimes rewriting steps into their terminology while still maintaining the necessary controls. Their active involvement in the process resulted in thorough buy-in.

As policies and procedures are finalized and released throughout the organization, internal auditing will be appropriately armed with information on these two areas of the business. The auditors will be able to help ensure that cash issues are handled consistently and provide assistance to managers who are unsure of records retention requirements. By helping to eliminate the confusion and doubts from the early consolidation period, internal auditing has clearly added value to the organization.



An audit of the franchising function had been delayed several times at management’s request. The manager explained that his department was new and that he was still in the process of building a team. Although his excuse for the delays seemed reasonable, the auditors later discovered that the manager had not given them the whole story.

The picture became dearer shortly after the manager was dismissed from the company. His replacement provided the auditors with the missing details — the department’s internal controls were weak, and the previous manager was afraid of what an audit might uncover.

The conversation with the new manager was open and honest. Franchising was a new function and considered critical to the long-term success of the division. However, many of the other groups — whose support was required if the franchise function was to succeed — were not cooperating. There was a conflict in priorities and a lack of understanding regarding the risks taken by the company as a whole. In particular, the company risked selling franchises without the ability to support them.

Clearly, a traditional audit would only report that the department was in shambles. Although this type of feedback might serve as awake-up call, it could just as easily destroy a few careers. The in-charge auditor felt there was a better approach — a control self-assessment (GSA) workshop.

Internal auditing discussed the idea of a facilitated workshop with the new manager and the division president. The latter agreed to sponsor the assessment and to require full cooperation and participation throughout the division.

The workshop was a great success. The department heads talked openly and extensively about the risks facing their groups, discussing what was wrong and what needed to be done. They defined action items, assigned each item to a member of the group, and set due dates for completion of their goals.

The franchise process is now on track. A letter of praise from the franchise manager is on display in the audit department, and the entire team recognizes that true value was delivered across the division.


CONGRATULATIONS TO THE PHOENIX CHAPTER for submitting April’s winning “Roundtable” story. In “Rounding Up Fraud,” an auditor reviewing bank account statements at a Philippine subsidiary noticed that transfers made between a U.S.-currency account and one held in Philippine pesos were always rounded to the nearest thousand. Although the amounts seemed reasonable based on prevailing exchange rates, the consistently even figures seemed unusual. Further investigation revealed that the subsidiary controller had been withdrawing cash from the peso account and pocketing some of the money before depositing it into the U.S.-dollar account. The auditor’s keen observation helped put an end to an embezzlement scheme that had been going on for many years, with stolen funds amounting to more than $100,000.

Internal Auditor awards a gift certificate to the affiliate, chapter, or individual submitting the best “Roundtable” story in each issue. Individuals interested in claiming the certificate should contact their affiliate president. Each “Roundtable” submission is worth five chapter achievement program (CAP) points and furthers The IIA’s motto of “Progress Through Sharing.”

COPYRIGHT 2001 Institute of Internal Auditors, Inc.

COPYRIGHT 2002 Gale Group