You are an internal auditor for a large manufacturer. The administrative assistant to the Corporate Treasurer calls and asks for your input on the appropriate process. The Corporate Treasurer, who reports to the CFO, has an employment contract that includes a company-paid penthouse. The penthouse lessor requires advance payment on the first of the month for the month's rental fee. The contract for the penthouse was signed by the Corporate Treasurer and was not negotiated by the company's purchasing department. The admin assistant doesn't think the CFO should be bothered to approve a monthly expense report for reimbursement. What issues do you see in this scenario and what process do you suggest and why?
The purpose of an internal audit is to ensure the integrity of world class internal controls in an organization. It is the responsibility of an internal auditor to highlight any issue wherein the internal control systems are either not in place or not working properly.
Internal control systems are for every department/function in an organisation, including accounting & finance, purchase (Contracts & Maintenance), production, etc. However, the auditor must give special consideration to internal controls in purchase department as it's the purchase department that approves all contracts the company enters into and any leakage in processes could result in practices and inefficiencies, corrupt practices and hence misuse of company funds.
The purpose of internal controls in purchase is to ensure that every transaction entered into is done at arm length's price, i.e. at fair market value and that the company gets the best deal possible.
In the given scenario, Corporate treasurer entered into the rental agreement for his penthouse without getting it approved and negotiated by the purchase department. This is clearly bypassing the appropriate process and could result in inefficiencies and wastage of company funds. The rent that corporate treasurer negotiated may be more that the limit available to him, or the rent may be more than the fair market rent for that property.
Further, it's a fair point that such contracts should be entered into by the processes of purchase department and the CFO should not be bothered for such transactions as the purchase process shall ensure the integrity of the transaction without any requirement of approval by CFO.
Suggested process:-
As a process, it should be made mandatory for every employee of the company to get the terms of their rent agreements approved by purchase department prior to finalization. This will ensure that the rent entered into is within the available limits for the respective employee and that the transaction is duly negotiated and entered into at the fair market rent
You are an internal auditor for a large manufacturer. The administrative assistant to the Corporate Treasurer...
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