Cost verification is a vital element of any cost reimbursable or target cost 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 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 may be missed
- Inappropriate and inflated audit “findings” can create mistrust and damage relationships
- Contractor’s time may be wasted (taking their eyes off delivering the Contract)
- Management time may be wasted
- Money is wasted on ineffective audit
To avoid these risks there are 5 basic questions you can ask your provider
- Q1. Have the objectives of the review been set with due thought?
We see many examples where clients and procurement teams have bought in 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. When we work with clients we help set audit strategies which are pragmatic and cost effective. We also advise on precisely when you should be auditing.
- Q2. Are the auditors qualified and experienced in financial audit?
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. Quantity surveyors and engineers typically have no training in this area. (Although they do lots of other things brilliantly!)
- Q3. Does the provider have a formal methodology?
To ensure consistency, there should be a formal methodology which auditors follow. It should demonstrate how the audit work is planned, delivered, recorded and reported on.
- Q4. 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.
- Q5. 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.
Use credible people with the right experience and qualifications
You wouldn’t want to ask a Chartered Accountant to carry out detailed design work or implement a health and safety programme. We are though, very good at cost verification audits.
After a minimum of three years of on the job audit training; professional audit exams; Institute accreditation; obtaining post qualification experience to gain a practicing certificate and continuing professional development you would expect us to be. (Admittedly the workings of the, International Auditing and Assurance Standards Board is not a great topic of conversation at a party.)
Many organisations are now seeking to provide cost verification services without any relevant professional background.
Using trained, qualified and experienced auditors will give you robust and reliable cost verification and will allow you to take action on problems before they get out of hand and most importantly help you protect your corporate and professional reputation.
To find out more about our collaborative approach to cost assurance or for a confidential chat about a potential issue please get in touch.
Darren Ward FCA, AQ – Managing Director
darrenward@theorangepartnership.co.uk
