Introduction :

Mahuli was appointed as the Internal Audit Head at XYZ Chemicals & Polymers Ltd. as a part of the rotation policy within the company from the Commercial Department. Mahuli was a qualified mechanical engineer and had initiated her career in Engineering Function, moved on to Production Department, Marketing and the Commercial Department.

On taking over, she reviewed the audits done during the current audit cycle and in the past. She also analysed the overall costs of the organisation and its different units. Being an engineer at heart, her attention was soon drawn to the details in the consumption of stores and spares. She asked her team members to review the earlier audit reports on consumption of stores and spares, maintenance of machines and the record of maintenance for the same.

The consumption and cost pattern showed a rising trend in the unit at Nashik, compared to the unit at Pune having similar production lines. It tapered to a common point in the present period indicating one of the following :

She also noticed that the last maintenance audit was done by a team of engineers and commercial persons and was comprehensively carried out two years back. Since the audit, there had been a change in the management at the plant. Considering these changes in the internal control environment, Mahuli revised the existing audit plan and made it more comprehensive.

1. Life Value Analysis of Bearings :

On an elaborate analysis of the reasons why the bearing could fail on the counts of Man, Machine, Method and Material, the team identified 300+ reasons. On a discussion of the reasons with the maintenance team, the applicability of the same were then shortlisted and action planned. Additionally, it was decided that the bearing manufacturer representative should be invited for a demonstration of the process of bearing change and the review of the organisational data. The inputs from the representative were used to suitably modify the planned action. One of the issues identified was that in some places duplicate bearings were also used. It was anticipated that the implementation of all recommendations would lead to a savings in bearings consumption by Rs.15 lacs a year on a recurring basis.

Material requisition slip was prepared indicating the job number for the requisitioned spares. On issue of these spares, the issue was also noted in the history card and a separate manual register maintained in the respective section. Using a data analysis tool, the data from the Inventory Accounting System was compared with data maintained in the spreadsheets for identifying the material consumed job-wise. A study of the same showed a mismatch between the type of job and the material used. A study of the register maintained in the department further indicated that the material was used for a job number other than that mentioned in the material requisition slip. A total of such instances for the audit period was worked out. Over a period of time, the total value of such items was over Rs.5 lacs. This analysis was sought to be covered for one year and the figure was over Rs.15 lacs. On interviewing the concerned officials, it was understood that the material was being adjusted from the supply end and then entries were being passed in the books to adjust the quantities.

In case of lubricants, it was noticed that in the cutting section, the consumption of lubricating oil was significantly higher than the prescribed standard. An analysis of the same was conducted. It was observed that a major process change had been initiated a year back by the new management as a cost saving measure. While the parameter on which the change was planned was achieved, the overall saving was lost with this increased consumption. Mahuli was able to identify the reasons and these were linked to the decision taken earlier. A process for reversal of the same was recommended.

Preventive Maintenance Schedules were made up for all machines. However, there was no prioritisation of the tasks to be undertaken. As a result, there were several tasks that were completed prior to schedule dates or not undertaken as per the records maintained. Certain preventive jobs were to be undertaken by shutting down the activity. Due to commercial considerations, the same was not done, and as a result, the scheduled maintenance was not carried out. A frequency of failure report analysis for the period clearly indicated that the reasons were controllable with timely preventive maintenance. A review of the minutes of the departmental meetings and operational review meetings indicated that the decision was deliberate to benefit from the then business boom. Mahuli and her team worked out the cost of not performing preventive maintenance when due with the added output. While the statistics were in favour of the profit, in the longer run, on technical grounds it was not justifiable due to irrepairable wear and tear of parts. Mahuli, based on her technical understanding, also presented a schedule for preventive maintenance with priorities that could be adopted. In this way low priority items could be delayed.

History cards of equipments were manually maintained, but not uniformly for all machines. As a result, critical information necessary to understand the condition of machines was not available for analysis. The organisation had invested in an ERP and had activated most of the modules, but the maintenance module was not activated due to lower priority to the function. There was also a perceived IT competence issue with the officials involved in maintenance.

Where history cards were maintained, it was seen that they were not uniformly updated. The details of the spares replaced and the reasons of the breakdown were not clearly mentioned in all cases. In only a few cases, was the cause clearly described. In some other cases, only the corrective action taken was mentioned. In some, the data was captured and at other times, data was not mentioned.

Job cards were created for various preventive maintenance and breakdown jobs, but costs were not estimated. Additionally, job cards were not created for all the jobs scheduled for the period. In a few cases, job cards were not prepared for breakdown jobs. Mahuli was informed that incompetence of engineers on the job prevented the possibility of capturing the estimates. She was informed that the data was being captured earlier, but was stopped over a period of time the system. In the absence of estimates for costs, an analysis parameter was not available for performance evaluation.

The job cards created were being entered in a spreadsheet and track maintained on its completion. In a number of cases, regularisation entries were made after the task was completed. As per analysis, jobs took longer than acceptable time for completion of jobs. An analysis of the jobs executed was carried out with reference to resources employed as per information collated from different records maintained. These were costed based on the salary/hiring rates of the concerned technicians. Material consumption was added based on the issues slip analysis. A detailed study and action plan on the basis of this data helped improve data availability, improve time frame for maintenance job execution with reduced cost.

Conclusion :

Based on the focus on maintenance issues, the management deemed it fit to initiate action for implementing the maintenance module within the ERP to institutionalise controls on all dimensions. Specific reports were defined for inclusion in monthly review meetings for controlling costs on maintenance. Overall, the feeling was that the Internal Audit team had done a good job. Success of Mahuli establishes that the internal audit function is a multi-disciplinary function.

Source : Deepjee Singhal Manish Pipalia Chartered Accountants