Auditing The Supply Chain in 2019: What to Know and Why

Historically, internal audits have predominantly concentrated on financial transactions and safeguards. However, a paradigm shift is occurring with auditors increasingly incorporating supply chain evaluations into their purview. What catalyzes this transition? A significant factor is the escalation of supply chain expenditures within numerous organizations, frequently as a consequence of diversifying product offerings and expanding sales conduits. Equally critical is the strategic influence of supply chains on organizational efficacy. For instance, disruptions at a principal supplier could detrimentally impact a company's operational performance.

Supply chain audits offer a valuable prospect for internal audit teams to scrutinize supply chain operations, aiming to optimize cost management and mitigate risks, as highlighted by Jonathan Eaton, the practice leader at Grant Thornton’s national supply chain practice.

Commencing with supply chain risk identification, the following breakdown illuminates common risks:

Engagement with Vendors and External Entities

A pivotal aspect of supply chain auditing involves ensuring organizational collaboration with vendors who deliver exemplary services at competitive rates while adhering to pertinent regulations. Vivian Fu, internal audit manager at National Grid, emphasizes the continuous necessity for efficiency due to regulatory constraints on customer charges. Her team's responsibilities include verifying vendor selection processes for compliance with corporate standards.

Contract Administration

Post-vendor evaluation and contract establishment, the emphasis shifts to contract administration. This typically involves clarifying departmental responsibilities, either purchasing or business units, for contract oversight and vendor performance monitoring. Fu stresses the importance of unequivocally assigning ownership for these tasks.

Inventory Oversight

For asset-intensive enterprises like National Grid, operating across diverse regions, inventory and warehouse management becomes a focal area. Fu interrogates whether the company maintains appropriate inventory flow and accessibility.

Annually, the United Nation’s World Food Programme (WFP) assists over 90 million individuals in upwards of 80 countries, providing sustenance to those affected by conflicts, natural disasters, and severe droughts. The criticality of ensuring safe and punctual food delivery to the intended recipients is paramount.

Kiko Harvey, inspector general, and her team scrutinize food and cash controls within the supply chain. They assess procedures for tracking food deliveries, from initial arrival in a country to warehousing and final distribution.

Data Protection and Cybersecurity

A recent Crowdstrike survey revealed that two-thirds of respondents had suffered a software supply chain attack, with financial repercussions averaging over $1.1 million. Bernie Donachie, managing director at Protiviti, notes the heightened risks associated with electronic vendor connections and recommends audits of data accessibilities and authorizations.

Geopolitical Considerations

Geopolitical strife can disrupt trade routes, while shifts in trade accords and tariffs can inflate costs or necessitate alternative supply sources. Internal auditors like Eaton contemplate mitigative strategies for these contingencies, such as identifying backup suppliers.

Challenges in Supply Chain Auditing

While supply chain audits gain prominence, their execution remains complex. Auditors often concentrate on singular segments due to constraints, making comprehensive understanding challenging. Furthermore, as Fu points out, identifying root issues requires extensive investigation.

Approaching a Supply Chain Audit

Fu advocates for engaging stakeholders early, aligning audit plans with the company's financial, operational, and compliance goals, and physically verifying inventories and business existences. These audits necessitate cross-departmental collaboration for risk identification and mitigation.

In conclusion, proficient supply chain auditors grasp the nuances of the business environment and collaborate effectively across the organization to pinpoint and strategize against supply chain risks.