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December 2013 63
Internal audItor
nchoring an audit on compliance with organizational policies
and procedures may assume those policies and procedures are
effective. But if the procedures are ineffective, then an audit
that seeks to reinforce compliance would subtract, instead of add, value. For some
audits, practitioners would better serve their organizations by vigorously challeng-
ing existing approaches instead of auditing compliance.
A routine audit of one organization’s fleet of 500 motor vehicles is one such
example. What generally was assumed to be an effective process, turned out to be
so poorly controlled and so open to fraudulent abuse that the fleet management
team was fired following the audit and new processes were put in place. These
changes resulted in more than AU $1 million in ongoing annual savings.
A motor fleet
audit illustrates
how auditors
can help uncover
weaknesses in
existing policies
and procedures.
Chris Kelly
Ian Guymer
Drive for
Effectiveness
A
AUDIT PRACTICE
December 201364 Internal audItor
Drive for effectiveness
Financing
Metropolitan InfraCo operates and
maintains a public transport network
for 200 million passenger journeys
each year, generating AU $1 billion
annually in fare revenue and govern-
ment subsidies. Maintenance and
fault-fixing crews travel regularly
around the network’s geographic cov-
erage area in leased, InfraCo-branded
company vehicles. The organization’s
risk management process identified
slightly higher than expected com-
pany vehicle costs, which prompted a
routine internal audit. Examining the
vehicle lifetime costs under the lease
agreement helped internal auditors
shed considerable light on how vehicle
risks had been passed back to the
organization, its vulnerability to being
overcharged, and the retention of
favorable cost and sale price variances
by the leasing company.
Many organizations lease their
business vehicles under financing
arrangements and, as often is the case
in finance, devils lurk in the details.
Parameters include the term of the
lease and the initial cost of the vehicle
increased by additional accessories
and reduced by dealer/manufacturer
discounts that may or may not be
passed on to the customer. To calcu-
late a monthly charge, vehicle leasing
companies need to make assumptions
about costs during the lease term,
including planned mileage, tires, ser-
vicing, administrative costs, terminal
value at the end of the lease, and an
implicit cost of finance and profit mar-
gin. A financial calculation then will
determine the monthly rental based on
these assumptions.
At the end of the term, the leas-
ing company may pass back to the
customer any realized downside cost
variances such as a loss at auction and
penalties for excess mileage; mean-
while, upside cost variances, such as
a profit at auction, potentially could
a mix of long-term leasing, outright
ownership, and short-term leasing.
There was no need to have the lat-
est models. The company could achieve
cost savings on new vehicles by taking
advantage of manufacturer and dealer
discounts available for prior year model
“run outs” or “close outs.”
Accessories added to costs, which
was paid for both through overpric-
ing in the initial cost calculation as
well as by inflating the cost base on
which interest and profit margin were
charged. The audit recommended
significant accessories be purchased
only with an authorized business case.
Furthermore, reusable accessories, such
as tow bars, canopies, and navigation
systems, could often be recycled at
low cost when vehicles were returned
at the end of the lease, rather than
bought new again. Savings through
these cost control measures were esti-
mated conservatively at AU $750 per
vehicle upon changeover, totaling AU
$375,000 over the following four years.
governance improvements
Vehicles are vulnerable to obvious
safety hazards, insurance and legal
risks, and nonbusiness usage with
possible tax implications. During the
motor fleet review, internal auditors
found there was no policy governing
driver responsibilities, and fuel card
abuse included long-distance driving
holidays, transporting family members,
and even recreational off-road driving.
Auditors worked with human resources
on several disciplinary interviews
be concealed and not passed back.
Depending on the leasing company’s
objectives, it could make optimistic
assumptions to charge a low monthly
rental, say to win a new client, then
profiteer with penalty charges at the
end of the lease. Alternatively, it could
make pessimistic assumptions at the
start of the lease about wear, mileage,
and terminal value, and then keep any
eventual profit on the sale for itself. It
also is possible to double-dip by charg-
ing for excess mileage, repairs — which
could be charged for but not carried
out — and consequent underachieve-
ment of terminal value when sold, all
of which are passed back as additional
costs to the client organization.
Based on its review of its vehicle
lifetime costs, internal audit deter-
mined that InfraCo was obtaining
poor value from the incumbent leas-
ing company. The audit resulted in
the organization retendering its fleet
management contract, which saved an
estimated 6 percent (AU $540,000)
on its AU $9 million annual vehicle
leasing costs.
Fitness For purpose
In conjunction with InfraCo’s manage-
ment, the audit compared the types,
quantities, and durations of vehicles
required. Vehicle specifications for
transporting people differed from those
for transporting tools, stock, and those
with mechanical adaptations with low
residual value. Vehicles variously were
required to meet long-term or short-
term needs, so the company considered
The audit resulted in the organization
retendering its fleet management
contract, which saved 6 percent.
TO COMMENT on this article,
EMAIL the authors at chris.kelly@theiia.org
December 2013 65
Internal audItor
Australia had approximately 1 million fleet vehicles in 2012, compared with 26 million
in Europe and more than 11 million in the United States, according to industry publication
Automotive Fleet
.
telematics. Even putting aside these
benefits of working closer with the
insurer to reduce accident frequency,
the immediate insurance premium sav-
ings amounted to AU $200 per vehicle,
totaling AU $100,000 each year.
ineFFiciency and Fraud
The ready abundance of data generated
by motor fleet processes allowed inter-
nal audit to analyze vehicle utilization
critically for the first time in InfraCo’s
history. One obvious fraud opportunity
was private usage of company vehicles.
Through fuel card usage data, the audit
found instances of vehicles used far
outside the organization’s usual geogra-
phy, often at popular tourist locations,
which were cross-matched to employee
leave data for disciplinary action. The
same data also provided evidence of
cards used to fuel multiple vehicles,
some of which could be corroborated
with gas station video surveillance.
Armed with this information, the audit
obtained confessions that fuel cards
were being used to fuel other family
members’ vehicles, which the company
was able to recoup.
One variation on private usage
auditors found was the allocation of
vehicles to favored individuals and
commandeering of pool cars by indi-
vidual staff members. Following their
discovery during the audit, withdraw-
ing these unauthorized benefits became
a management priority.
An advantage of having electronic
tollgate time-of-day data was the
ability to match it to timesheets to
show patterns of late arrival at work,
employees knocking off work early
while claiming a full shift, and even
overtime that had not been worked.
This technique simultaneously
enhanced payroll audit work.
In theory, odometer data at the
time of refueling should have allowed
analysis of vehicle over/under-use,
fuel efficiency, advance warning of
resulting in cost reimbursements and
one employee termination.
Further audit outputs included
drafting of a motor fleet policy, proce-
dures, and templates stipulating:
ɅBusiness case authorization
required for all new vehicles.
ɅNonbusiness use limits.
ɅFormal driver acknowledgement
of their responsibilities for safe
driving, use of cell phones, ser-
vicing, parking infringements,
and accidents.
Exception reports and stronger disci-
plinary measures were then put in place
in consultation with labor unions to
cover those items in the policy with
which management was most con-
cerned, based on historic incidents and
cost-efficiency priorities.
insurance eFFiciencies
Alongside a history of vehicle misman-
agement, InfraCo had a poor claims
history, and consequently insurance
premiums were high. Furthermore,
when the list of leased vehicles was
compared to those declared for insur-
ance purposes, mismatches were found.
While the insurers allowed for the
ongoing turnover of vehicles, some had
been missed because of incomplete data
supplied by the company. The audit
highlighted a communication solution
to prevent future recurrence.
One obvious insurance efficiency
was to increase the deductible amount
on each claim, which reduced the per-
vehicle premium by AU $200 each
year. Of course, this also required vigi-
lant management of driver behaviors to
minimize the number of future claims.
The audit also brought to light
that the insurer was willing to help
InfraCo through defensive driver
education, online data to allow the
fleet manager to monitor claims and
repeat occurrences, direct contact with
accident-prone drivers, and discounts
for vehicle management tools such as
end-of-lease mileage penalties, and
discrepancies relating to long-distance
private usage. But because of the lack
of policy, procedure, and managerial
control, auditors found that driv-
ers usually provided null odometer
readings when refueling. Under the
improved control regime resulting
from the audit, odometer data will
provide another useful data mine for
monitoring vehicle use.
Immediate cost recoveries from
individual employees amounted to
AU $20,000. More importantly, the
disciplinary action is estimated to
have saved ongoing vehicle abuses
amounting to approximately AU
$100 per vehicle each year, totaling
AU $50,000.
putting a value on controls
By taking a critical view of existing
processes consistent with The IIA’s
Definition of Internal Auditing as
a “consulting activity designed to
add value and improve an organiza-
tion’s operations,” InfraCo’s motor
fleet audit helped bring about radical
changes to personnel, policy, and pro-
cedural controls — plus cost savings
of more than AU $1 million for each
year the new controls remain in place.
In management’s eyes, this helped to
put the quantifiable value of internal
control beyond question. Moreover,
it demonstrated that before assuring
compliance with existing procedures,
internal audits may have greater
impact by first considering whether
the procedures themselves achieve, or
impede, organizational efficiency and
control objectives.
CHRIS KELLY, DPROF, MIIA (Australia),
is a partner at internal audit consulting
firm Kelly & Yang in Melbourne, Australia.
IAN GUYMER is an associate of Kelly &
Yang and a motor fleet specialist based
in Melbourne.