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Project Management: A Project Management: A Managerial ApproachManagerial Approach

Chapter 12 – Project AuditingChapter 12 – Project Auditing

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OverviewOverview

• Goal-based Project OutcomesGoal-based Project Outcomes

• Project Audit ReportsProject Audit Reports

• Audit Life CycleAudit Life Cycle

• Report CredibilityReport Credibility

• Revenue ReportingRevenue Reporting

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Project AuditingProject Auditing

• A major vehicle for evaluation is the A major vehicle for evaluation is the project auditproject audit, a more or less , a more or less formal formal inquiryinquiry into any aspect of the project into any aspect of the project– A project audit is A project audit is highly flexiblehighly flexible and may and may

focus on whatever matters senior management focus on whatever matters senior management desiresdesires

– The evaluation of a project The evaluation of a project must have must have credibilitycredibility in the eyes of the management in the eyes of the management group for whom it is performed and also in the group for whom it is performed and also in the eyes of the project team on whom it is eyes of the project team on whom it is performedperformed

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Purposes of Evaluation - Goals of Purposes of Evaluation - Goals of Project AuditProject Audit

• Four independent dimensions of success:Four independent dimensions of success:– The most straightforward dimension is the The most straightforward dimension is the

project’s project’s efficiencyefficiency in meeting both the in meeting both the budgetbudget and and scheduleschedule

– Another dimension, and the Another dimension, and the most complexmost complex, is , is that of that of customer impact/satisfactioncustomer impact/satisfaction

– A third dimension, again somewhat straightforward A third dimension, again somewhat straightforward and expected, is and expected, is business/direct successbusiness/direct success

– The last dimension, somewhat more difficult and The last dimension, somewhat more difficult and nebulousnebulous to ascertain, is to ascertain, is future potentialfuture potential

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Purposes of Evaluation - Goals of Purposes of Evaluation - Goals of Project AuditProject Audit

• Another primary purpose of evaluation is to Another primary purpose of evaluation is to help translate the achievement of the help translate the achievement of the project’s goals into a contribution to the project’s goals into a contribution to the parent organization’s goalsparent organization’s goals

• To do this, all facets of the project are To do this, all facets of the project are studied in order to studied in order to identifyidentify and and understand understand the the project’s strengths and project’s strengths and weaknessesweaknesses

• The The resultresult is a set of is a set of recommendationsrecommendations that can help both ongoing and future that can help both ongoing and future projectsprojects

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Evaluation– Benefits of Project AuditEvaluation– Benefits of Project Audit

• A successful project evaluation via A successful project evaluation via audit can help an organization:audit can help an organization:– Identify problems earlierIdentify problems earlier– Clarify performance, cost, and time Clarify performance, cost, and time

relationshipsrelationships– Improve project performanceImprove project performance– Locate opportunities for future technological Locate opportunities for future technological

advancesadvances– Evaluate the quality of project managementEvaluate the quality of project management– Reduce costsReduce costs

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Purposes of Evaluation – Need for Project Purposes of Evaluation – Need for Project AuditAudit

• Organizational BenefitsOrganizational Benefits– Speed the achievement of resultsSpeed the achievement of results– Identify mistakes, remedy them, and avoid Identify mistakes, remedy them, and avoid

them in the futurethem in the future– Provide information to the clientProvide information to the client– Reconfirm the organization’s interest in, and Reconfirm the organization’s interest in, and

commitment to, the projectcommitment to, the project

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Purposes of Evaluation – Other Project Purposes of Evaluation – Other Project Audit OutcomesAudit Outcomes

• Ancillary goals Ancillary goals – Identify organizational strengths and Identify organizational strengths and

weaknesses in project-related personnel, weaknesses in project-related personnel, management, and decision-making management, and decision-making techniques and systemstechniques and systems

– Identify risk factors in the firm’s use of Identify risk factors in the firm’s use of projectsprojects

– Improve the way projects contribute to the Improve the way projects contribute to the professional growth of project team membersprofessional growth of project team members

– Identify project personnel who have high Identify project personnel who have high potential for managerial leadershippotential for managerial leadership

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Project AuditProject Audit

• The project audit is a The project audit is a thorough thorough examinationexamination of the management of a of the management of a project, its project, its methodology methodology and and proceduresprocedures, its , its recordsrecords, its , its properties,properties, its its budgetsbudgets and and expendituresexpenditures and its and its degree of completiondegree of completion

• The formal The formal reportreport may be presented in may be presented in various formatsvarious formats, but should, at a , but should, at a minimum contain comments on some minimum contain comments on some specific pointsspecific points

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Project AuditProject Audit• Six parts of a project audit:Six parts of a project audit:

– 1. 1. Current statusCurrent status of the project of the project– 2. 2. Future statusFuture status– 3. Status of 3. Status of crucial taskscrucial tasks– 4. 4. Risk assessmentRisk assessment– 5. Information pertinent to other projects5. Information pertinent to other projects– 6. 6. LimitationsLimitations of the audit of the audit

• It is far It is far broaderbroader in scope in scope than a than a financial auditfinancial audit and may deal with the and may deal with the project as a project as a whole orwhole or any component or any component or set of set of componentscomponents of the project of the project

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Audit DepthAudit Depth

• Time and moneyTime and money are two of the most are two of the most common limitscommon limits on depth of on depth of investigation and level of detail investigation and level of detail presented in the audit reportpresented in the audit report

• Accumulation, storage, and Accumulation, storage, and maintenance of auditable maintenance of auditable datadata are are important cost elementsimportant cost elements

• Two often Two often overlooked costsoverlooked costs are the are the self protective activity of teamself protective activity of team members during an audit, and the members during an audit, and the potential for project potential for project moralemorale to suffer as to suffer as a result of a negative audita result of a negative audit

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Audit DepthAudit Depth

• There are three distinct and easily There are three distinct and easily recognized levels of project auditing:recognized levels of project auditing:– General auditGeneral audit - normally most constrained by - normally most constrained by

time and resources and is usually a brief time and resources and is usually a brief review of the project touching lightly on the six review of the project touching lightly on the six parts of an auditparts of an audit

– Detailed auditDetailed audit - usually conducted when a - usually conducted when a follow-up to the general audit is requiredfollow-up to the general audit is required

– Technical auditTechnical audit - generally carried out by a - generally carried out by a qualified technician under the direct guidance qualified technician under the direct guidance of the project auditorof the project auditor

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Audit TimingAudit Timing

• The The first auditsfirst audits are usually done are usually done earlyearly in in the project’s lifethe project’s life

• Early audits are often focused on the Early audits are often focused on the technical issuestechnical issues in order to make sure in order to make sure that key technical problems have been that key technical problems have been solved solved

• Audits done Audits done later in the life cyclelater in the life cycle of a of a project are of project are of lessless immediate immediate valuevalue to to the the projectproject, but are , but are more valuablemore valuable to to the parent the parent organizationorganization

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Audit TimingAudit Timing

• As the project develops, As the project develops, technical riskstechnical risks are are less likelyless likely to be matters of concern to be matters of concern

• Conformity to the Conformity to the scheduleschedule and and budgetbudget become the become the primary interestsprimary interests

• Management issuesManagement issues are major matters of are major matters of interest for audits made interest for audits made latelate in the in the project’s lifeproject’s life

• Postproject auditsPostproject audits are often a are often a legal legal necessitynecessity because the client specified because the client specified such an audit in the contractsuch an audit in the contract

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Risk Event GraphRisk Event GraphRisk

High

Cost

Low

Project life cycle

Chances of risksoccurring

Cost to fixrisk event

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Preparation and Use of Audit Preparation and Use of Audit ReportReport• The information should be arranged so The information should be arranged so

as to as to facilitatefacilitate the the comparisoncomparison of of predicted versus actual resultspredicted versus actual results

• Significant Significant deviationsdeviations of actual from of actual from predicted results should be predicted results should be highlightedhighlighted and explained in a set of footnotes or and explained in a set of footnotes or commentscomments

• Negative comments about individuals or Negative comments about individuals or groups associated with the project groups associated with the project should be avoidedshould be avoided

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Construction and Use of Audit Construction and Use of Audit ReportReport• Information that should be contained in Information that should be contained in

the audit report:the audit report:– 1. Introduction1. Introduction

– 2. Current status2. Current status

– 3. Future project status3. Future project status

– 4. Critical Management issues4. Critical Management issues

– 5. Risk Analysis5. Risk Analysis

– 6. Caveats, Limitations, and Assumptions6. Caveats, Limitations, and Assumptions

P

C T

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Project Auditor/Evaluator Project Auditor/Evaluator ResponsibilitiesResponsibilities

• First and foremost, the auditor should First and foremost, the auditor should “tell “tell the truth”the truth”

• The auditor must approach the audit in an The auditor must approach the audit in an objectiveobjective and and ethicalethical manner manner

• Must assume responsibility for what is Must assume responsibility for what is included and excluded from consideration included and excluded from consideration in the reportin the report

• The auditor/evaluator must The auditor/evaluator must maintain maintain political and technical independencepolitical and technical independence during the audit and treat all materials as during the audit and treat all materials as confidentialconfidential

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Project Auditor/Evaluator Project Auditor/Evaluator ResponsibilitiesResponsibilities• Steps to carry out an audit:Steps to carry out an audit:

– Assemble a small team of Assemble a small team of experienced experienced

expertsexperts

– Familiarize the team with the Familiarize the team with the requirementsrequirements

of the projectof the project

– Audit the project Audit the project on siteon site

– After the completion, After the completion, debriefdebrief the project’s the project’s

managementmanagement

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Project Auditor/Evaluator Project Auditor/Evaluator ResponsibilitiesResponsibilities• Steps to carry out an audit (cont.):Steps to carry out an audit (cont.):

– Produce a Produce a written reportwritten report according to according to

a prespecified formata prespecified format

– DistributeDistribute the the report report to the project to the project

manager and project team for their manager and project team for their

response response

– Follow upFollow up to see if the to see if the

recommendations recommendations have been have been

implementedimplemented

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The Project Audit Life CycleThe Project Audit Life Cycle

• Like the project itself, the audit has a life Like the project itself, the audit has a life cycle composed of an orderly progression cycle composed of an orderly progression of well-defined events:of well-defined events:– Project audit Project audit initiationinitiation– Project Project baseline definitionbaseline definition– Establishing an Establishing an audit databaseaudit database– Preliminary Preliminary analysis analysis of the projectof the project– Audit Audit report report preparationpreparation– Project audit Project audit terminationtermination

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Essentials of an Audit/ Essentials of an Audit/ EvaluationEvaluation

• For an audit/evaluation to be conducted For an audit/evaluation to be conducted with skill and precision, and to be with skill and precision, and to be generally accepted by senior generally accepted by senior management, the client and the project management, the client and the project team, several conditions must be met:team, several conditions must be met:– The The audit teamaudit team must be must be properly selectedproperly selected– All All recordsrecords and files must be and files must be accessibleaccessible– Free contactFree contact with project members must be with project members must be

preservedpreserved

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Audit/Evaluation TeamAudit/Evaluation Team

• The choice of the audit/evaluation team is The choice of the audit/evaluation team is critical to the success of the entire critical to the success of the entire processprocess

• The size of the team will generally be a The size of the team will generally be a function of the size and complexity of the function of the size and complexity of the projectproject

• For a small project, one person can often For a small project, one person can often handle all the tasks of an audit, but for a handle all the tasks of an audit, but for a large project, the team may require large project, the team may require representatives from several areasrepresentatives from several areas

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The Audit/Evaluation TeamThe Audit/Evaluation Team

• Typical areas that may furnish audit Typical areas that may furnish audit team members are:team members are:– The project itselfThe project itself– The accounting/controlling departmentThe accounting/controlling department– Technical specialty areasTechnical specialty areas– The customerThe customer– The marketing departmentThe marketing department– Purchasing/asset managementPurchasing/asset management– Human resourcesHuman resources– Legal/contract administration departmentLegal/contract administration department

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Audit/Evaluation TeamAudit/Evaluation Team

• The main role of the audit/evaluation The main role of the audit/evaluation team is to conduct a thorough and team is to conduct a thorough and complete examination of the project or complete examination of the project or some prespecified aspect of the projectsome prespecified aspect of the project

• The team must determine which items The team must determine which items should be brought to management’s should be brought to management’s attentionattention

• The team is responsible for The team is responsible for constructiveconstructive observationsobservations and advice and advice based on the training and experience of based on the training and experience of its membersits members

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Access to InformationAccess to Information

• In order for the audit/evaluation team to In order for the audit/evaluation team to be effective, it must have free access to be effective, it must have free access to all information relevant to the projectall information relevant to the project

• Most of the information needed will Most of the information needed will come from the project team’s records or come from the project team’s records or from various departments such as from various departments such as accounting, personnel, and purchasingaccounting, personnel, and purchasing

• SomeSome of the most of the most valuable valuable informationinformation comes from documents comes from documents that that predatepredate the the projectproject

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Access to InformationAccess to Information

• Examples of documentsExamples of documents that predate the that predate the project:project:– Customer Requirements (i.e. Customer Requirements (i.e. RFP Process)RFP Process)– Minutes of Minutes of project selectionproject selection meetings meetings– Minutes of Minutes of senior management committeessenior management committees that that

decided to pursue a specific area of technical interestdecided to pursue a specific area of technical interest

• Priorities must be set to ensure that important Priorities must be set to ensure that important analyses are undertaken before those of lesser analyses are undertaken before those of lesser importanceimportance

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Access to Project Team and Access to Project Team and OthersOthers

• Several rules that should be followed when Several rules that should be followed when contacting project team and other contacting project team and other stakeholdersstakeholders– Avoid misunderstandingsAvoid misunderstandings between the between the

audit/evaluation team and project team audit/evaluation team and project team membersmembers

– Project team always be made Project team always be made awareaware of of in-progress auditin-progress audit

– Avoid Critical CommentsAvoid Critical Comments •Constructive suggestions where appropriateConstructive suggestions where appropriate

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Access to Project Team and Access to Project Team and OthersOthers

• At times, information may be given to audit At times, information may be given to audit evaluation team members in confidenceevaluation team members in confidence

• Discreet attempts should be made to Discreet attempts should be made to confirm such information through non-confirm such information through non-confidential sourcesconfidential sources

• If it If it cannot be confirmedcannot be confirmed, it should , it should notnot be be usedused

• The auditor/evaluator must protect the The auditor/evaluator must protect the sources of confidential information sources of confidential information

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MeasurementMeasurement

• Measurement is an integral part of the Measurement is an integral part of the audit/evaluation processaudit/evaluation process

• Performance against planned budget and Performance against planned budget and schedule usually poses no major schedule usually poses no major measurement problemsmeasurement problems

• Measuring the Measuring the actual expenditureactual expenditure against the against the planned budgetplanned budget is is harderharder and depends on an in-depth and depends on an in-depth understanding of the procedures used by understanding of the procedures used by the accounting departmentthe accounting department

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MeasurementMeasurement

• Big Challenge: determine what revenues Big Challenge: determine what revenues should be assigned to a projectshould be assigned to a project

• All All cost/revenue allocationcost/revenue allocation decisions must decisions must be made when the various be made when the various projectsprojects are are initiatedinitiated

• The battles are fought “up front” and the The battles are fought “up front” and the equity of cost/revenue allocations ceases to equity of cost/revenue allocations ceases to be so serious an issuebe so serious an issue

• As long as As long as allocationsallocations are made by a are made by a formulaformula, major , major conflict conflict is avoided-or at is avoided-or at least, least, mitigatedmitigated

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Auditor/EvaluatorAuditor/Evaluator

• Above all else, the auditor/evaluator Above all else, the auditor/evaluator needs “permission to enter the needs “permission to enter the system”system”

• If the auditor maintains a calm, relaxed If the auditor maintains a calm, relaxed attitude, the project team generally attitude, the project team generally begins to extend limited trustbegins to extend limited trust

• The first step is to allow the auditor The first step is to allow the auditor qualified access to information about qualified access to information about the projectthe project

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Auditor/EvaluatorAuditor/Evaluator

• Deal professionally with information Deal professionally with information gathered, neither ignoring nor stressing gathered, neither ignoring nor stressing the project’s shortcomingsthe project’s shortcomings

• Recognize and reinforce aspects of Recognize and reinforce aspects of project’s strengthsproject’s strengths

• Trust is earned during an audit even with Trust is earned during an audit even with negative findingsnegative findings

• Trust-building is a slow and delicate Trust-building is a slow and delicate process that is easily lostprocess that is easily lost