Human Resources & Procurement: Why Should Auditors Care?
Most private and public entities struggle with profitability and/or sustainability. Many have died a slow death during these difficult economic conditions, due largely to undiagnosed problems, while others attempt to diagnose and treat the source of the problems with limited success.
Currently, business principles are simplistic about income and expenditure; as well as assets and liabilities. Any control framework around these elements has three equally important components, namely; People (HR), Processes (e.g. procurement), and Technology which links People to Processes. Albert Einstein once said, insanity is "doing the same thing over and over again and expecting different results". As HR and Procurement are often the biggest determinants of a company's total expenditure and cash flows, a change in the management approach in relation to these two elements is vital to organisational effectiveness; and auditors have a huge role to play in this regard!
THE MANAGEMENT OF HUMAN RESOURCES (HR)
The HR system has a direct impact on all processes of the business. One of the most important being strategy, planning and budgeting. The best people are needed to be able to develop a
feasible strategy, plan its implementation diligently, and monitor the budget competently. It is thus important that the HR processes are designed to identify any competency gaps in the workforce that may lead to these important aspects of the business to fail. This is where performance management comes in -as a continuous rather than a six monthly or even annual process. Continuous performance management, whether done in line with Jack Welch or Kaplan and Norton theories, should include budgetary controls and procurement management. Specific Key Performance Indicators (KPIs) should be developed at every management level to ensure that these two disciplines are adhered to at all times. Once this is in place and effective monitoring is practiced, half the battle is won!
THE MANAGEMENT OF PROCUREMENT
A good procurement system is based amongst others, on contracts, a quotation system and minimum margin achievement; or a combination of these. For various reasons, a company may need to contract or use quotations to achieve its procurement goals. The focus here will be on the contracting aspect as it typically accounts for the major part of procurement expenses.
If your company's net profit margin is 30%, it means up to 70% of your income is expensed. Controls should be in place to regulate this material expenditure. The absence of integrated contract management as well as policy and procedures may result in the business targets and initiatives not being implemented and/or met; potentially causing the business to fail.
To achieve our procurement and contract management objectives, except for HR which we have already delt with separately, the following four elements are important : 1) Planning; 2) Delivery; 3) Supplier relationship; and 4) Contract review and close-out.
To continue reading this article, subscribe to the FREE February issue of The Future CFO Magazine.