Ethical issues 2768
jc13 last edited by
I work for a large plc in the internal audit department. I completed the testing of about 10 controls at a company recently and I failed 4. I discussed these with my Manager and the director of SOX and they agreed they were failures.
One of the fails related to the fact that the only control covering inventory valuation was a system configuation control relating to calculations on the system. The actual control activity was the input of the std cost from price lists by the Product Managers however this control did not exist on the PCW therefore I failed it on design.
The Manager passed the control in the prior year because he there was a EUC however I checked and the EUC was just made up to pass the control. The Manager is a people pleaser and is looking to make friends in the company and he uses his staff to deliver the bad news.
My internal audit manager is pressuring me to sign off the control but is not willing to send me any email documenting our discussions or the decision?
Should I pass the control or not? What would you do?
gmerkl last edited by
Let us hope you are better at describing issues to your manager, line managers and in audit reports. It is hard for other people to assess whether something is an issue or not without having the full picture.
It seems that you are only talking about controls over inventory valuation. So if I understand you correctly the control objective is that inventory is valued in accordance with whatever GAAP you are using as your primary accounting standard. So we are not talking about controls over the quantity of items that are in the inventory.
Are we talking about inventory items that are purchased externally or items that are manufactured by the company (i.e. finished goods, semi-finished goods or work in progress) or both? What ERP system do you use for inventory management, for purchasing and for product costing? As far as I remember, SAP recommends to set the system to use the moving average price for purchased inventory items and to set it to use the standard price for in-house manufactured inventory items.
If we are talking about purchased items, then I think there is even a standard report in SAP’s material management module that allows you to compare the current moving average price to the last purchase price.
‘The actual control activity was the input of the std cost from price lists by the Product Managers however this control did not exist on the PCW therefore I failed it on design.’
What the heck does ‘PCW’ stand for? From your description, the control and its control objective is not clear, so I can not assess why you think its design is not effective.
If we are talking about in-house manufactured items, then SAP allows the resulting product cost from a product costing run to be automatically included as the standard price of the products to which the calculations relate to. If you want to check whether the latest sales price is lower than the product cost/standard price, you would need to run a report that compares the two and lists the items where the latest sales price is below or dangerously close to the product cost. They need to do this in order to ensure that the lower of cost or market principle is followed in inventory valuation.
‘The Manager passed the control in the prior year because he there was a EUC however I checked and the EUC was just made up to pass the control. The Manager is a people pleaser and is looking to make friends in the company and he uses his staff to deliver the bad news.’
What is an ‘EUC’? Do you mean an entity level control? I guess you mean some sort of compensating control. What compensating control did he describe in the prior year? A potential compensating control would be a detailed review of the profitability of individual product sales that were made close to year end. Such a review could also reveal instances where the sales price is below the product cost or where the sales price plus necessary costs to sell (e.g. shipping) is below the product cost. Any control over the valuation of inventory that is based on in-house manufactured product costs only works if it is based on effective control over the whole product costing process (i.e. cost accounting including budgeting/planning). Did they ever audit this?
‘My internal audit manager is pressuring me to sign off the control but is not willing to send me any email documenting our discussions or the decision? Should I pass the control or not? What would you do?’
Is your manager the chief audit executive (i.e. the head of the internal audit department)? Do you have policies and procedures or templates that define how internal audit work papers should look like and how conclusions should look like? An internal working paper that documents the testing of a control should document how you reach your conclusion whether the control is operating effectively or not. Ideally you can argue with internal audit’s work paper documentation policy and bring your arguments why you think the control is not effective and say that he should supply his arguements why he thinks the control is effective so that you can include it in your work papers. If he does not want to do it or if you do not agree, he can always change your work papers and write the stuff in there himself.
harrywaldron last edited by
8O Yes, this could be an ethical dilema, if you feel strongly the control shortcomings could potentially have a material impact on financials.
However, SOX is somewhat nebulus at times and requires human judgment as to whether this concern could have material consequences.
Some ideas and questions to evaluate in ascertaining this future:
- Are inventory valuation approach being done completely improperly or illegally with preferable accounting procedures for your industry/company (whether in context or SOX or not)? Basically, are facts being intentionally covered up or is it just a difference of opinion?
- Is there a potential for material Financial consequences if inventory valuations are improperly stated? (seems like a yes to me)
- Can you sign off with concerns? In working with auditors for decades, there may be a way of reflecting no material consequences have occured but state the concerns as points of improvement.
Good luck and please share back if you have questions.