Construction Auditing: the Foundation to Risk Management and Internal Control

As the global economy slowly recovers, companies will begin to invest once again in large construction projects. Many projects that had been on hold through the downturn are now beginning to find funding. These projects include both new construction and significantly upgrading facilities such as: Distribution Centers, Manufacturing Facilities, Shared Service Centers, Retail Sites, Data Warehouses, Educational Facilities, and Healthcare Facilities.

While a multimillion dollar project represents one of a company’s largest capital expenditures, it is sometime on of the least controlled expenditures. On October 21st, the Senior Supervisors Group issued a report on the financial crisis and in it they stated, “…weaknesses in risk management and internal controls contributed to industry distress during the financial crisis.” Similarly, weak risk management practices and internal controls could lead to significant losses or delays in a large construction project.

Companies need to learn the lessons of the financial crisis and embed risk management and internal control into all processes, especially construction. The first step to improving risk management and internal control is to leverage the principals of audit. An audit, in this case a construction audit, provides the foundation.

Construction Auditing starts with the Construction Contract
A construction contract will include a variety items such as project description, project timeline, cost estimate, payment terms, documentation requirements and sections on insurance and indemnification. However, the contract should also include certain provisions to specifically protect the owner’s interest. The American Institute of Architects provides a series of standard construction contracts which can be used as a template for construction projects. While these templates provide a solid framework, they are not necessarily written with a bias towards owners rights. Provisions such as “Right-to-Audit” and “Change Orders” plus other internal control enhancements need to be customized. These modifications will improve the owner’s control over project costs, allow for recoveries, and are necessary to strengthen the ability to audit.

"The audit is an integral part of the construction project process. Performed well by seasoned professionals it will assure the Owner that financially they received the product contracted and paid for."

Knowing what to modify and even how to modify is not common knowledge and can’t be done through the legal review process. It is critical to have this review completed by an experienced construction audit professional and it should be done prior to executing the contract. Doing so will save thousands, if not hundreds of thousands of dollars throughout the project.

Pro Bono Construction Contract Health Check
Are you confident in your construction contracts, but would like a second look? For a limited time, Vonya Global will provide a pro bono review of your construction contracts. Certain limitations apply, please call or email for additional information.

Fraud Detection Workshop in Chicago October 27 - Afternoon Session Added

Due to popular demand an afternoon session has been added to this workshop. The session will begin at 2:30 pm and conclude by 5:00 pm. Admission is free but registration is required. Please confirm by October 20, 2009.

About the Workshop
Fraud schemes are not complex. Yet, fraud is rarely caught until it is too late. Why? Understanding the fraud scheme is not enough. Identifying the fraud concealment strategy and how it is portrayed in data is the only way to detect fraud. It is essential to learn how to detect fraud before it is too late.

Data mining is the key tool to locate and recognize fraudulent transactions. This workshop will demonstrate:

- How to build a fraud scenario approach
- How to map data fields to fraud scenarios
- How to interpret data for patterns and frequency of fictitious vendors
- How to build the fraud audit plan to include data mining

Please visit the Vonya Global website to register or request additional information.

SEC: In-House 404 Costs Top Audit Fees (from CFO.com)

A two year study conducted by the SEC revealed two very interesting statistics. First, Small companies pay more for SOX compliance than do Large companies. Not in absolute terms, but in relative terms. This information comes as no surprise to CFO's of small companies.

"Although larger companies incur higher compliance costs, smaller companies incur higher scaled costs (i.e., relative to their assets) on average," the SEC wrote in a report released Friday.

Second, internal SOX compliance costs are larger than external audit fees by a large percentage. This comes directly from the CFO.com article:

"What may come as a surprise is that the majority of Sarbox-compliance costs aren't going into auditors' pockets; rather, companies' in-house work to follow the 2002 law's internal-controls provision — Section 404 — is more largely to blame for the expense. The highest cost of Sarbox, the SEC said, is "internal labor costs," followed by audit fees and then costs related to another third party, such as a consultancy, used for help with compliance."

This all comes on the heels of the 4th extension the SEC has given Small Caps to comply with Section 404 of the Sarbanes-Oxley Act. As stated in an earlier post, Vonya Global has a proprietary methodology for helping Small Caps and IPO companies comply with the rigors of Sarbanes-Oxley. Sox OnPOINT™ is a top-down risk based approach which streamlines the compliance effort and is consistent with the PCAOB Audit Standard Number 5. Sox OnPOINT™ helps our clients reduce the cost of compliance.

For more information please visit our website or send us an email.

Small Caps Get Another SOX Reprieve

The SEC announced on Friday, October 2, 2009 that the SOX deadline for Small Caps is pushed to June 2010. The effort by the regulatory body to make the compliance process easier for the Small public companies makes one wonder if the compliance requirement will ever stick. If so, Vonya Global has a proprietary methodology geared to help Small Caps and IPO's (newly listed public companies). SOX OnPOINT(TM) is a top-down risk based approach which streamlines the compliance effort and is consistent with the PCAOB Audit Standard Number 5.

http://www.vonyaglobal.com/sarbanes-oxley-sox-sarbox.html

The full release from the SEC can be found at: http://www.sec.gov/news/press/2009/2009-213.htm