In a recent KnowledgeLeader article, Paul Pettit, Director for Protiviti's Capital Projects and Contracts practice in Houston, Texas, explained how auditors can use data analytics to avoid the massive waste spending that often goes hand-in-hand with hiring outside vendors and contractors.
Although the techniques Pettit outlines are detailed and extremely valuable, they don't require overly complicated or expensive software.
"The data analytics we are talking about here can literally be accomplished using Microsoft Excel along with basic search techniques like sorting, filtering, V-lookups and H-lookups on a contractor's or vendor's detailed transactions within their job cost data," writes Pettit.
Data analytics can be used to monitor nearly any contractor or vendor in any industry, but Pettit says they are particularly useful for auditing high-risk contracts in which vendors and contractors bill based on cost plus fee, time and materials, or time and expense arrangements.
According to Pettit, three major areas are especially critical to audit when using data analytics: labor, equipment and expenses.
When it comes to applying data analytics to labor charges, Pettit says you need the following four sets of electronic data on hand:
- The original contract, including the list of personnel staffed along with their individual job classification, labor rate and burden
- All invoices showing what was billed to the company during the contract period
- The vendor's job cost data indicating their incurred costs for the project
- The payroll files indicating the names of each worker and the amount paid out to them, including fringes and benefits
In order to validate equipment charges, Pettit says that auditors need to have a list of the following:
- All equipment used
- Each equipment identification number
- Whether the equipment was purchased or rented
- How it was charged to the company (hourly, daily, weekly or monthly) and at what rate
- If there was an operator associated with it
- How long the equipment was used
- Whether it was located onsite or offsite
- Whether the equipment consumed fuel. If so, how much?
Auditors can easily use data analytics to identify many types of billing errors on expenses, including:
- Accruals, charge backs, adjustments and inter-company transfers
- Vendor bonuses charged back to the company
- Incentives charged to the company that were not earned
- Certifications, licenses, repairs and insurance claims charged to the company and not the vendor
- Unusual expenses that a vendor may charge back to a client, like personal items, gifts, incentive events and team-building outings
"It is vital to work with vendors and contractors willing to provide their job costs, labor burdens, invoices and payroll data in electronic formats," writes Pettit. "Companies that frequently work with vendors and outside contractors should negotiate upfront to put auditing rights into their contracts to ensure that their auditors will receive the necessary information in electronic format when it is time to audit...in addition, it helps to maintain some leverage - in the form of money owed or future work - to use as recourse in case a vendor balks at providing electronic data in a timely manner."
How has data analysis helped you efficiently audit vendors and contractors?