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Developing a Preventative and Sustainable P-Card Program

Purchasing card (P-Card) spending is on the rise, particularly among colleges and universities. The use of P-Cards is expected to increase 62 percent by 2018 reaching $377 billion, according to the 2014 RPMG Purchasing Card Benchmark Survey. The expansion of P-Card programs and use is expected to continue given the myriad of benefits P-Cards offer including streamlining the procurement-to-pay process, lowering operational costs and taking advantage of supplier discounts. Originally, P-Cards were used for small dollar transactions to help reduce or eliminate the need for petty cash. However, while P-Card use has grown, it has become increasingly challenging to maintain compliance as organizations struggle to gain insights into their program. Analyzing high transaction volumes using spreadsheets and manually reviewing receipts becomes labor-intensive and inefficient.

TWO PERSPECTIVES, ONE COMMON GOAL

From the standpoint of internal audit, the objective of a P-Card system is to rid the organization of fraud, waste and abuse. While there are a variety of ways to search for fraud, most are not foolproof. Sampling is unreliable for detecting and preventing misuse, and card issuer applications provide limited data. Spreadsheets have capacity limitations and are prone to errors.

Many auditors have found success in using purpose-built data analytics tools to extract and analyze data from different sources and file types to detect instances of fraud, waste and abuse. These tools provide the ability to examine 100 percent of the P-Card program data. More than ever, auditors are embracing technology to stay ahead of risks and exposures that may lead to revenue losses.

From a business standpoint, the objectives are slightly different. While detection of misuse is important, stakeholders within the organization not only need to know that something went awry; they want to dive deeper into specific risk areas to identify underlying causes. Data analytics can help auditors look through high volumes of transactional data to identify anomalies, but it is often a reactionary approach. Infractions are seldom caught in time to recover funds. In fact, it takes an average of 24 months to detect procurement fraud at which time 89 percent of all proceeds are unrecoverable. The business goal is to stay well ahead of the problem.

PREVENT A CULTURE OF MISUSE

The tolerance threshold varies for every organization. If a $300 million P-Card program incurs $20,000 in annual misuse, the convenience and administrative cost savings may offset the loss. However, inappropriate spend involving large sums of money could quickly become newsworthy and damaging to the organization’s reputation. Stakeholders need assurance that preventative measures are in place and working properly.

“Continuous monitoring is about creating a sustainable internal control environment, not creating more work. It goes beyond identifying a single set of problems to providing actionable insights to the business. Organizations can create a collaborative environment where everyone works to strengthen controls, while expanding the P-Card program.”


Transactional data can be analyzed, but misuse goes unnoticed without information from other sources such as accounts payables and human resources. For example, if John uses his P-Card to purchase gasoline while on vacation, the misuse is typically not found using traditional auditing techniques because fuel is a normal expense for John since his position requires business travel. John shares his clever cost-saving tactic with a close coworker, who begins to take advantage of similar weaknesses in the system for personal gain. The culture of misuse perpetuates and continues to go undetected.

When looking at exceptions, can you determine whether it was an isolated incident where clarification of policies and procedures need further explanation or a habitual problem? How many times has each employee violated the policies? Was one person in violation while the majority followed policy? Is there a department that tends to have multiple violations on a regular basis? Is misuse related to specific spending areas? These questions can only be addressed if the analysis includes data from different sources, such as employee data, category of spend, etc.

Running data analytics to test P-Card data provides some valuable details about exceptions, especially when you incorporate multiple data sources including:

  • P-Card Transaction Data – Provided by the card issuer and contains records of all transaction details including merchant category code, item description, purchase date, amount and vendor name.
  • Cardholder Master – Provided by the card issuer and contains data for all cardholders in the P Card program. Details include last four digits of each card, monthly card limit, card status, date issued, etc.
  • Employee Master File – File of employees with details such as employee name, identification number, department, vacation schedule and employment status.
  • Expense Signoff – Expenses submitted by employees with details such as purchase date, cardholder comments and manager signoff details.
  • Accounts Payable (AP) – Lists payments made by AP and details such as invoice date and number, vendor name, item description and transaction amount. This data can be used to detect duplicate transactions across P-Card and AP processes.

Additionally, if the organization uses an expense management system such as Concur, data can be automatically extracted and analyzed on a regular basis to ensure compliance. Expense management systems allow employees to submit expenses for approval and/or reimbursements.

Broadening the scope of data being examined helps bridge gaps and allows you to see fraud schemes that would be impossible to detect otherwise.

ASSESS RISK AND CONTROLS

To gain an understanding of the unique ways P-Cards are being used within the organization, and whether policies and procedures are being followed, perform a risk and controls assessment. By testing historical data, you can establish a benchmark to gauge the severity of issues and identify problem areas. Begin by comparing current data with the year prior to detect patterns for normal or abnormal spending trends. Calculate average spends by department to look for outliers and unusual spend patterns. Historical data is useful for assessing the entire data population year to year.

Examples of Analytics Tests/Queries:

  • Monitor for duplicate payments between P-Card merchants and Accounts Payable vendors
  • Check for charges at inappropriate or unusual merchants (i.e. department stores, cash, personal care) by MCC code or vendor name keyword search
  • Pinpoint split charges to circumvent purchasing card limits
  • Identify cards used by terminated employees and/or employees on leave of absence
  • Search for expenses that may be approved without verification of receipt
  • Look for cardholders who made purchases on weekends or holidays
  • Check for unused or duplicate cards, which may be causing unnecessary liability
  • Search for sales tax charges. As a non-profit organization, most universities are exempted from sales tax.
  • Identify the top 20 spenders to pinpoint which cardholders have the highest total purchases

Next, break the queries down into sub-processes to pinpoint problem areas such as:

  • Card issuance: Involves the assignment of cards to appropriate departments and employees
  • P-Card usage: Involves examining card spend across departments and employees to detect outliers or unusual spending patterns
  • Policy management: Determine whether existing policies and procedures are being followed by all employees

Reliable Remediation

When an exception is detected, how is it dealt with, or is it dealt with at all? Traditional remediation, usually involving emails, is time consuming, unreliable and error prone. Multiple follow-ups are necessary between several parties to ensure resolution, and managers are not always updated about whether or not the issue has been resolved. Continuous monitoring also automates remediation followups until resolution is achieved; including escalation if the issue is not addressed within a set timeframe. This process can be customized to align with business processes and structure.

Get the Big Picture of the P-Card Program

Continuous monitoring tools offer dashboards that present information graphically on key program metrics such as the amount of spend across a period of time and the level of exceptions. Dashboards can be configured based on what the end users want to see or what information is beneficial to department leaders.

Reviewing trend and patterns can help gauge the performance of controls and policies, and identify any potential gaps that need addressing. Visualization helps the end user consume data and insights by looking at patterns, not just rows and columns of numbers. Trends become more apparent, and the data becomes more useful to everyone participating in the review process.

Sustained Growth

P-Card programs often lose the support of top management if there are repeated cases of misuse, especially if they are discovered too late to take corrective action and recover losses. The administrative cost savings, convenience and efficiency gains associated with using P-Cards benefits the organization, but only if exposure and risk are managed properly. Management needs assurance that policies and procedures are being followed, and audit is staying ahead of misuse.

The University of Miami, which includes academics, hospitals and research facilities, is growing at a rapid pace. Their growth will undoubtedly lead to an increase in P-Card use. The university’s internal audit department has already taken steps to move from periodically reviewing random samples of P-Card transactions to continuously monitoring 100 percent through the use of data analytics technology. Exceptions are shared with department managers to provide a comfort level about how P-Cards are being used within the organization, and whether policies and procedures are being followed.

“As our corporate cards program grows, we provide assurance at both the department and management levels that we have sufficient policies and procedures in place to review transactions,” said Hiram Sem, Executive Director of Treasury Operations and Cash Management, University of Miami. “Card holders must understand they are responsible and accountable, but we must also carefully monitor expenditures to identify unauthorized charges early. Technology has helped us refine our review process and handle larger data volumes that come with expansion.”

The value of continuous monitoring reaches well beyond exception detection. There are three advantages driving the trend towards continuous monitoring:

  • access to more data sources to get a complete picture of what is transpiring within the organization;
  • the ability to assess whether policies are being followed; and
  • the empowerment to improve business processes by gaining deeper insights.

When an organization is working towards a problem-free environment, it provides a sustainable process to proactively look for and address issues. When employees know every transaction is being monitored, it creates a catalyst for behavioral changes within the organization.

Advisory Services: Balancing Value and Independence

Internal audit offices are best positioned to enhance and protect their organizations when they provide both assurance and advisory services. Devoting more time to advisory services has both its risks and rewards. One of the greatest rewards includes enhancing relationships and building trust with management. However, if the advisory services do not meet clients’ expectations, there is a chance of harming the internal audit office’s reputation. This article will explore an example of advisory services from Montana State University as well as identify steps to enhance advisory services at your audit shop.

DEFINING ADVISORY SERVICES

According to the Institute of Internal Auditors (IIA), “Internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organization’s operations.” At Montana State University (MSU), management has been more receptive to the term, advisory services, than to the term, consulting, because advisory services has more of a connotation of internal instead of external expert advice. These two terms will be used synonymously throughout this article.

“Internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organization’s operations.”
Internal auditors provide two basic types of services: assurance and consulting services. The IIA defines assurance services as, “An objective examination of evidence for the purpose of providing an independent assessment on governance, risk management, and control processes for the organization.” The IIA defines consulting services as, “Advisory and related client service activities, the nature and scope of which are agreed with the client, that are intended to add value and improve an organization’s governance, risk management, and control processes without the internal auditor assuming management responsibility.”

According to these definitions, one major difference between these two types of services is the level of independence the auditor must maintain. Assurance services require the auditor to conduct an “independent assessment.” The consulting services definition level of independence is “without the internal auditor assuming management responsibility.”

These differences in the level of independence can be further highlighted by another key difference between assurance and advisory services. In Research Opportunities in Internal Auditing, Urton Anderson discusses the number of parties involved in assurance and advisory services. For assurance services, there are three parties involved: the auditor, activity management and the third party to which assurance is being provided. This third party could be the audit committee of the board, senior management or some other party, depending on the internal audit function’s specific circumstances.

Although many internal auditors may refer to activity management as the client for their assurance projects, this third party could also be considered a client because they are receiving the benefits of assurance. It would follow that clear independence is necessary to ensure that the assurance provided to the third party client is objective and unbiased. Auditor judgment on an assurance project’s objectives, scope, procedures, results or any other matters must not be subordinated to influence from activity management.

Advisory services only have two parties: the auditor and activity management, so activity management is clearly the client for these projects. The influence of activity management is built into advisory services because “the nature and scope of [the services] are agreed [upon] with the client.” Therefore, the level of independence for advisory services is for the auditor not to assume management responsibility.

Anderson also presented the idea of the assurance/consulting continuum (see Exhibit 1) in Research Opportunities in Internal Auditing. The three types of services on the left side of the continuum are the traditional assurance services that many internal audit offices likely provide. Remediation services, on the far right side of the continuum, are a type of consulting service where an internal auditor “assumes a direct role designed to prevent or remediate known or suspected problems on behalf of the client.” Assessment and facilitation services are the two types of services where internal auditors in higher education have great opportunities for helping to enhance their organization’s operations.

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According to Anderson, assessment services are “engagements in which the auditor examines or evaluates a past, present or future aspect of operations and renders information to assist management in making decisions.” Examples of assessment services include:

  • The study and evaluation of the proposed restructure of the organization to reflect the most practical, economical and logical alignment;
  • Estimating the savings from outsourcing a process; and
  • Assessing the adequacy of internal control in a proposed accounts payable system.

Facilitation services are “engagements in which the auditor assists management in examining organizational performance for the purpose of promoting change. The auditor does not judge organizational performance in this role. Rather, the auditor guides management in identifying organizational strengths and opportunities for improvement.” Examples of facilitation services include:

  • Control self-assessment;
  • Benchmarking;
  • Business process reengineering support;
  • Assistance in developing performance measurement; and
  • Strategic planning support.

EXAMPLES OF ADVISORY SERVICES AT MSU

MSU’s Office of Audit Services (OAS) had the opportunity to provide both facilitation and assessment services as part of an administrative operations efficiency and effectiveness initiative called OpenMSU. The director of OAS reports directly to the MSU president with no other functional reporting lines. This reporting line places OAS closer to senior management than to the board or the system-level administrative body.

When MSU’s current president, Waded Cruzado, arrived in 2010, MSU was anticipating concerns about state appropriations as a result of the recession, so it began to consider new ways to become more efficient. President Cruzado initially developed a small working group to consider ways to more efficiently provide back-office administrative operations, such as finance, human resources and sponsored programs administration.

President Cruzado’s leadership style involves having regular and broad inclusion of the campus community in its improvement initiatives, so she grew the small working group of five people into a group of 17 that included deans, directors, department heads, faculty and staff. I provided facilitation services to my client, the president, as we proceeded to coordinate this group and to develop the initiative’s mission, goals and program management structure.

The goals of increased efficiency and improved effectiveness were balanced by goals of enriching the people who provide administrative services.
Working with the 17 members of the OpenMSU steering committee was challenging, but rewarding, and led to the initiative’s unique character – the goals of increased efficiency and improved effectiveness were balanced by goals of enriching the people who provide administrative services and satisfying the people who receive the services. The plan for achieving these goals was to develop a series of recommendations for improvement based on thorough data collection and campus input.

This led to OAS providing assessment services with the clients being the OpenMSU executive sponsors: the president, provost and vice president for administration and finance. OAS was selected because it had the skill set to gather information about administrative services and because it was independent of the functions being assessed. These assessment services included administering two surveys, measuring administrative
processes and conducting other activities. The first survey was provided to the population of people that provided administrative services and was intended to identify which processes they felt were the most critical to improve. The second survey was provided to a random sample of university employees and was based on the SERVQUAL methodology for measuring service quality.

The administrative process measurement activity was developed by first working with the different functions to inventory their processes. The APQC process classification framework was used as guidance for inventorying processes. Then Banner and other data was used to quantify process volumes (e.g., number of purchasing card transactions) and standard process times were obtained by working with a sample of departments’ staffs. This data proved to be very helpful as MSU worked to rightsize its first shared services operation. Shared services and the other projects that were undertaken as a result of recommendations from the OpenMSU initiative are included in the OpenMSU roadmap (see Exhibit 2). OpenMSU is now in its fifth year, and all of the projects on the roadmap are underway or completed.

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OAS’s extensive work on OpenMSU was likely just a result of a unique set of circumstances. However, OAS still aims to include advisory services projects as a significant percentage of its annual work. During a typical year, OAS spends 10 percent to 15 percent of its direct time on advisory services, and this time is usually spent assisting management on emerging issues. For example, OAS intends to work with the Enterprise (information) Security Group (ESG) and the Payment Card Industry Data Security Standards (PCI DSS) working group in the current year. OAS will work with ESG by helping to implement a process to inventory servers maintained by distributed units and gather additional information on these servers, such as the type of data, the purpose of the server and the party responsible for security. For PCI DSS, OAS will augment the working group to assist departmental accountants and other merchants that receive credit card payments by helping them to understand the questionnaires that must be completed for all of MSU’s many credit card merchants.

OAS also provides advisory services to stay abreast of and to help with activities throughout the university by serving on committees and councils. OAS staff serve as non-voting members on the following committees and councils:

  • Environmental, Health and Safety Committee;
  • Information Security Council;
  • President’s Executive Council;
  • Research Compliance Committee; and
  • University Council (where all university policies are discussed and approved.

KEYS TO SUCCESSFUL ADVISORY SERVICES

An initial step in providing advisory services is having the office’s charter include a statement allowing advisory services. The biggest key, however, for successful advisory service is to build trust and relationships with management. Patience is essential as this takes time, but auditors should always treat management and all employees with respect, interact with others with a positive demeanor and not be perceived as playing “gotcha.”

Management also needs to know how having an auditor provide advisory services can help them…
Management also needs to know how having an auditor provide advisory services can help them, so auditors should use opportunities to communicate to management about their strengths. Through auditors’ core competency of evaluating processes, they develop strengths such as rigorously researching regulations and policies to determine what is and isn’t allowed; analyzing data and processes to develop insights into opportunities and problems; and gathering information that can be used to understand complex situations. Management will be more likely to engage auditors for advisory services once they trust auditors and understand what they can bring to the table. Also, auditors shouldn’t be afraid to offer their services to management if they think their skills can add value to a project.

After management engages auditors for advisory services, it is important to clarify the expectations for the objectives, deliverables and level of audit resources that will be dedicated to the project. This could be done formally or informally. In addition, auditors should educate their clients about The IIA standards and auditors’ responsibility to maintain independence and objectivity, so that it is clear where the lines are drawn regarding the auditor’s involvement with the project.

RISK AND REWARDS OF ADVISORY SERVICES

The greatest risk of providing advisory services is the actual or perceived loss of independence.
The greatest risk of providing advisory services is the actual or perceived loss of independence. According to “Internal Auditing: Assurance and Consulting Services,” there are two thresholds that auditors should not surpass when providing advisory services. Auditors must ensure that management responsibilities are not assumed, and auditors must not audit their own work. Auditing one’s own work is self-explanatory, however, assuming management responsibilities is more open to interpretation. “Internal Auditing: Assurance and Consulting Services” describes assumption of management responsibilities as follows, “Internal auditors should not make ultimate decisions or execute transactions as if they were part of management.”

Those in public universities could also be subject to the U.S. Government Accountability Office’s (GAO’s) Government Auditing Standards, also known as the Yellow Book. In Chapter 3 General Standards, Requirements for Performing Nonaudit Services, the Yellow Book lists 10 examples of management responsibilities. The following is a selection of these examples:

  • Setting policies and strategic direction for the audited entity;
  • Accepting responsibility for the management of an audited entity’s project;
  • Accepting responsibility for designing, implementing or maintaining internal control; and
  • Providing services that are intended to be used as management’s primary basis for making decisions that are significant to the subject matter of the audit.

Other risks associated with providing advisory services include: using limited audit office resources on less significant risks; not having the knowledge, skills or other competencies to perform a project; and suffering from a damaged reputation if services do not meet client expectations.

Building trust and better relationships with management is one of the greatest rewards of providing advisory services. These were also mentioned in the section on keys to successful advisory services because they are part of a virtuous cycle. Stronger relationships lead to greater involvement; this leads to a better reputation, which ultimately leads to being asked to be involved with more important projects. Building trust with management can also allow auditors to have greater access to organizational knowledge, which is critical to effectively assessing risk at the audit universe level.

Working on different types of projects also provides auditors with opportunities to develop new skills and knowledge. Advisory services projects particularly help auditors improve their understanding of the business, which is often cited as a key attribute of successful auditors. Finally, working with staff from other units helps auditors to become better at collaboration, which is essential to implementing positive change in higher education.

The IIA’s new Mission of Internal Audit is “To enhance and protect organizational value by providing risk-based and objective assurance, advice, and insight.” “To enhance and protect” really sums up what internal audit can provide to its organizations. To enhance the organization by providing objective expert advice on operations, and to protect by looking for emerging issues and reviewing internal practices to assure leadership that all is well. Internal audit offices that can effectively provide both assurance and advisory services will be best equipped to deliver on fulfilling this mission to both enhance and protect their organizations.

References

International Professional Practices Framework, Altamonte Springs, FL: The Institute of Internal Auditors, 2013.

Anderson, Urton, Research Opportunities in Internal Auditing, Chapter 4: Assurance and Consulting Services, Altamonte Springs, FL: The Institute of Internal Auditors, Research Foundation, 2003.

Reding, K. F., Sobel, P. J., Anderson, U. L., Head, M. J., Ramamoorti, S., & Salamasick, M, Internal Auditing: Assurance & Consulting Services, Chapter 12: The Consulting Engagement, Altamonte Springs, FL: The Institute of Internal Auditors, Research Foundation, 2008.

GAO-12-331G Government Auditing Standards, Chapter 3 General Standards, Requirements for Performing Nonaudit Services, U.S. Government Accountability Office, December 2011.

Mission of Internal Audit, The Institute of Internal Auditors, Retrieved August 13, 2015 from: https://global.theiia.org/ standards-guidance/Pages/Mission-of-Internal-Audit.aspx.