A cosourcing success: plugging the telecom cash drain; telecom costs were soaring, and the chief operating officer demanded to know why. He tasked internal audit and procurement management to find the answer and to develop solutions to lower costs - related article: Audit Program Summary for Telephone Bill Review

Internal Auditor, Feb, 2003 by Catherine Oliven, Lindy Westerfeld, Myles W. Crane

IF YOUR COMPANY'S CHIEF OPERATING OFFICER (COO) summoned you at a moment's notice and asked you to explain why internal controls were not reining in escalating telecommunication costs, what would you do? At Comdisco Inc., a technology services company based in Rosemont, Ill., telecom expenses had risen more than 12 percent in nine months. The COO challenged the chief audit executive (CAE) and chief procurement officer (CPO) to provide solutions. The CAE and CPO recognized a need to cosource with telecom specialists who could guide management through the complex and arcane web of telecom billing codes, acronyms, and hidden federal fees. There are essentially two types of service providers who capture selling, general, and administrative (SG&A) savings. Their services typically are performed on either a flat-fee or percentage-of-findings basis. Because percentage-of-findings firms can contractually request up to 50 percent of total savings identified, the CAE and CPO opted for a more modest flat-fee approach. T his choice helped the company to preserve the lion's share of the savings and eliminated the potential for time-consuming discussions about dollar values of alleged savings. In retrospect, it was a smart decision.

The CAE and CPO engaged two telecom specialists who, at the end of the trail, revealed several simple, sensible, and significant cost-savings by focusing on four key areas: 1) telephone bill review, 2) traffic analysis for voice services, 3) verification of taxes and surcharges, and 4) telecom cost reduction best practices. On the following pages, we -- the CAE and telecom specialists -- discuss our approach to the audit.

TELEPHONE BILL REVIEW

The scope of the audit review included telecom cost activity at corporate headquarters and at selected field operations in other states. We screened the applicability of telephone bills, evaluated the accuracy of reports, and performed several other analyses (see "Audit Program Summary For Telephone Bill Review," this page).

Our first control objective was to analyze the reasonableness of expenditures by assembling documentation. When telecom bills and service and equipment (S&E) records are evaluated together, they provide detail on fixed costs, usage, and service types that help determine how efficiently services are being used. Audit procedures for the first control objective included:

1. Defining audit scope based on location, time period, and service type. If an organization covers many geographic locations, auditors should set their targets based on regional phone company boundaries, if possible. Then, they will only have to deal with each vendor once. Auditors should use a preliminary scope of the prior three to six months, because this time window captures any quarterly or semi-annual invoices. Finally, auditors should determine which vendors and/or service types to include, such as local, long distance, or wireless.

2. Requesting accounts payable (AP) to sort through company records for invoices charged to the specific general ledger code for telephone expenses, based on the parameters above. Preferably, this should be documented in spreadsheet or computer assisted audit technique format to facilitate future manipulation of the data.

3. Sorting data by vendor and account or invoice number. This summary will be used to create a list of phone vendors. Pull hard copies of these invoices.

4. Cross-referencing the invoice numbers to the vendor account code numbers also on the bill. If the account code has not been captured by AP, add it to the spreadsheet. Also track any account descriptions and allocations for use in subsequent audit analysis.

5. Contacting the account representative for the company's local phone vendor and request a copy of all S&E records -- sometimes called customer service records (CSRs) -- for accounts identified on the AP spreadsheet. The S&E records provide the complete detail of all services, and their fixed costs, which are summarized on the local phone bill. This detail is usually given in Universal Service Order Code (USOC), of which there are 34,000 codes in use. The vendor's business office can help decipher them. S&E documents are not available for long-distance companies. The auditors, the head of the telecom department, or the outside consultants may need to contact long-distance vendors directly for detailed circuit information.

The second control objective was to create a telecom expense-control database with information gathered from phone company S&E records and copies of actual bills. The company can use this database to identify additional cost savings; maintain current inventory; and track adds, service changes, or other moves on an ongoing basis. Audit procedures for the second control objective were:

1. Using the phone company S&Es and copies of the bills to determine which information to track, such as: circuit number, circuit type, circuit cost, installation location, billed-to address, specialty services provided (e.g., 800 numbers, ISDN numbers, direct inward dial numbers), and predetermined interexchange carrier (PIC) codes.