From time to time I was lucky enough to get to do some consulting work. These were usually fairly large audits, involving a number of external experts. As the “data guy” I was often given very little time to perform the required analysis. On such audit was a review of the costs for a major construction project. The audit team did not have all of the necessary expertise and had hired experts in project management, construction, and data analysis (me). It was interesting to work with experts from outside of audit and in an area that I did not have a lot of expertise (construction).
The audit was requested by senior management. Management was concerned because they knew that the manager responsible for a major, multi-phased, construction project would have a great deal of influence over the contractors. It was early in the construction project and millions of dollars worth of contracts were still up for grabs. Management felt that this put the project manager in a position where he could request “favors” from the contractors in exchange for the promise of future contracts. They also knew that the company did not have a lot of experience in managing construction projects. For these reasons they requested that audit perform a multi-phased review of the project – starting with the controls over the project management office.
It was not a surprise to anyone when the auditors determined that the project manager had arranged for one of the contractors to do work on his house, and bill the cost to the company. But, the audit director was curious about how the auditors had found the fraud so quickly. They had only been at the construction site for three days, and had already uncovered more problems than any other audit team had found in audits lasting months or longer.
Anne, the team leader, explained the approach the audit team had taken to address the concern that the project manager might be getting kickbacks from the contractors. First, they obtained the time sheet file from each contractor, detailing the number of hours worked by each person for the past month. They also obtained a copy of the pass control database for the past month – each contractor working on-site was issued a day pass, and the information was recorded in the pass control database. Next, a join of the two files by contractor name, and date, was performed; identifying the hours claimed by the contractor that were not substantiated by the pass control data. The auditors had planned on using the data to identify over-billing by contractors; however, when one of the contractors was questioned about the over-billing he told them that the reason the workers did not show up on the pass control database was because they had been working off-site on that day. He had been told that all the hours worked, regardless of location, were to be billed to the project. If he didn’t like it, someone else could be hired – so he didn’t argue. They obtained the address from the contractor and checked it out – it was the project manager’s house.
A further comparison of the invoiced materials with the contract values for several contractors identified the supplies which had been misdirected to the project manager’s house. With the information in hand, the auditors questioned the project manager and he confessed.
The project management and construction experts were able to identify several issues related to planned vs actual expenditures; and areas where delays in certain steps would have the most impact on the completion schedule. They also identified certain managers who were placing a significant number of costly and time-consuming amendments. In each case, I was able to perform analysis to help assess and identify their concerns.
For example, while the overall project was on budget, the project called for the construction in several phases. Each phase was identified as a sub-project and had its own budget. However, the auditors discovered numerous instances where workers hired under one contract were recording their time against another contract. This was found by comparing the timesheet data with the contract data. The total hours by worker for each contract was compared with the total hours billed by contract. A detailed analysis identified a serious over-budget problem with one of the projects. However, another newly started project, that was still under-budget, was being used to subsidize the first project. As a result, the second project, barely 12% started, had already used up 36% of its budget. The manager responsible for the construction of both buildings had been hiding inefficiencies in the first building by charging them against future construction of the second building. The same manager was scheduled to leave the job for a promotion elsewhere within the company and his replacement would likely have been tainted by the over-budget problems if the auditors had not discovered the problem first.
A simple analysis of contract amendments and amounts by requestor identified the managers who were generating the most number of amendments and the cost impact. Comparisons of planned to budget and an analysis of the planned vs actual completion dates was also performed.
ACL Commands: EXPRESSIONS, CLASSIFY and JOIN
Lessons-learned: It can be extremely useful to bring in outside experts. In fact, the IIA standards require the CAE to ensure that the audit team has the necessary skills to complete the audit. However, it is also important to ensure that these experts follow the audit standards when performing their work. In this case, the team lead carefully described the audit objectives, scope and the audit work plan when the entire team and kept a close watch on the work being done and the verified the results.
Senior management had developed and followed a good risk management process. The construction was critical to several strategic objectives and they identified several risks for which they felt an immediate audit would help to mitigate. In addition to the fraud, control weaknesses were identified and addressed – reducing further risks. In the end, the construction projection was only 7% late and 3% over-budget.