The Audit Trail

Originally written on May 27, 2017

Questions that are frequently asked, with specific regard to Audit / Internal Check / Hindsighting - call it what you may, are very many. Yet the ones that don't get addressed properly and remain very critical are :

1.    How do we set the scope for audits in products like Farm Equipments ?

2. Why should we have an internal check / audit mechanism ?

3. Don't we trust our employees / Fellow Colleagues ?

4.     Should an organization invest in Internal Audit ? If so, why ? 

5. What should I as an auditor do to enhance value to organization ?

6.    What are the typical Audit Observations in Farm Equipments that would impact Senior Management / Strategic Heads ?

7. 
   

Just thought of unravelling some of these one by one :

SCOPE OF AUDITS :

These are generally towards

1. Mapping observations of a sample and comparing the same to Pre-Defined Mark Up Targets that is already communicated, and measuring extent of variance.

   
   

    Eg :  The given hypothesis is that a district generally consumes 40-45 Hp tractors ( 70% Sales )

The Audit Observations show 30% sales in 35-40 Hp, 20% Sales in 40-45 Hp, 25% Sales in  >45 Hp. The variance then indicates that only 20% of the 70% matches hypothesis, and  the balance preferences have changed.

UNLESS YOU HAVE PRE-DEFINED METRICS, AUDITS ARE INEFFECTIVE TOWARDS FRUITFUL AND  MEASURED CORRECTIVE COURSE OF ACTION.

         This could be Hp, Implements, Crop, Profile, Topography, etc.

2.     Anchoring as a feedback to the Policy Making Department / Strategic Teams,          providing key inputs with Risk Weights and Criticality.

Regular Sampling of Cases analyzed for patterns. These Patterns refer to criteria which have been found as the critical reason for cases getting into delays / arrears / NPAs / Write Offs / Delinquencies in the past. These differ from Financier to Financier.

3.      The proverbial "WCGW" - What Can Go Wrong - Process Flow Verification in the transaction from End to End.

Process Flow and Testing Checks to see if the process is functioning properly and whether sufficient / proper control mechanisms are present.

4       Objective of the exercise should be to make processes seamless for the ultimate   customer. Audit Should NEVER be a finger pointing exercise. Follow the MUDA

Principles here

   (a)         Ensure there is no unnecessary Processes

   (b)         Ensure there is transitional Time Loss ( From one process to the other )

   (c)          Ensure there are no excesses / flab in any segment / Department

   (d)         Ensure to check that all points of Manual Intervention are functioning.

Examples of each of these in Farm Equipment :

(a)    Crop Documents, Land Documents for the entire extent of the land declared are examples of Unnecessary insistence of documentation.

(b)   Process can run concurrently. For Eg : If there is need of clarity / Query, entire process need not come to a stop until clarity is provided.

If clarity is Critical to Decision                    – Yes, the process will need to be halted.

If clarity is Not Critical to Decision             - The process may run concurrently        

(c)   Excessive exposures to

a.      Single Brand

b.     Single Horsepower

c.      Profile Type

d.     Geography Concentration

e.     Successive Funding without Justification

(d)  Data collected through Field Investigation and Data that is actually acquired fresh from the customers should be compared for the extent of accuracy.  ( Field Investigation to Fresh Data Acquisition period should not exceed 60 days ).

WHY SHOULD WE HAVE THESE CHECKS :

I remember an old adage which is very apt in this case :

21 days to a habit

45 days for settlement as routine

90 days to a process

180 days to second nature

Anything done repeatedly for 21 days – irrespective of it right / wrong, becomes habitual after 21 days.

If the same is followed continuously further exceeding 45 days, it settles down as routine and in 90 days becomes a standard process.

In about 180 days (6 months time), the process becomes difficult to correct and almost becomes second nature / natural style of functioning.

Any unbiased check done within 75 days, with a proper feedback mechanism can bring about correction towards desired pathways. Hence these checks are to ensure we do not waver from our pathway in the excitement of running towards our goal.

To err is human ;

Experience is making mistakes and learning from them ; 

Success does not consist in never making mistakes but in never making the same one a second time.

Any mechanism that helps us sharpen our approach should be seen positively and not a negative act.

WHY SHOULD WE HAVE THESE CHECKS :

We spoke of a seamless experience. Have you ever walked in to a branch and wondered that you’re experience as a customer has never changed while people have ? This has been achieved largely due to :

1.      Clear Segregation of Duties

2.      Clear Review of Roles and Job Areas and reconciliation on day to day basis

3.      Updation mechanisms and automation of processes

From the perspective of making processes seamless, it is always good to have checks as milestones to let us know where we are.

Let’s look at some Farm Equipment Finance examples of the above.

(a) Person who does the FI should prepare the Viability report. Haven’t we found similar looking appraisal sheets, this is because one case with least queries is often marked by our sales colleagues as role model, and then its “CTRL+C   -   CTRL+V” sans the demographics.

(b)   5 Whys Technique – If the executive who proposes the case is able to answer upto 5th level of Why, then the customer’s requirement is well understood. This helps in servicing the customer the best.

(c)    Our hold over the asset we fund – Our hold over the customer – Our follow up mechanism – This is the key. If all are clearly defined and aligned the portfolio performance will start showing.

However, until we are sure of the alignment, the check systems will give us an indication of where we stand, and how much more we need to bridge.

So what do our seniors expect to see ?

They would like to see all audit observations culminate into broad buckets of :

(a)   Control Risk – Process Risk itself is not rightly identified and hence we get “hit” observations.

(b)  Negligence quotient - Risks and Controls are rightly identified - Violation / Lapse has occured

(c)   Inherent Risk - Risks which are part of the industry – yet we were late in identifying them as inherent

(d)  RAAC Quotient – Risks which we will accept under “Risk Assessed and Accepted Criteria”, and still accept to underwrite .

(e)  HIGH Risk & Unacceptable Risk Segment – This percentage will constantly need to be measured. A very high percentage in this bucket is suggestive of a RISK AVERSIVE approach. Without RISK there is no PROFIT and hence high RISK AVERSIVE approach may not auger well for the organization.

If during our audit after disbursement we have observed that there is gross variation in implements used and what was reported during initial FI, then the verification controls at the branch and the Credit team are said to be weak . FI is a defined process and hence this observation will qualify as NEGLIGENCE.

The management would be keen on knowing the number of instances of such events under the same type of “negligence” Quotient from the – SAME region, SAME state, SAME Regional Head, SAME Zonal Head etc. This gives them an idea of the extent of damage and provisioning they need to make.

I shall always remember a line one of my mentors stated " An Audit Activity is meant to be constructive, measuring, constant, untiring and as far comprehensive as possible. Drive Change, It will be resistent, for it was meant to be, and yet we shall all see a common goal ".