Project Auditing

A major vehicle for evaluation is the project audit, a more or less formal inquiry into any aspect of the
project
- A project audit is highly flexible and may focus on whatever matters senior management desires
- The evaluation of a project must have credibility in the eyes of the management group for
whom it is performed and also in the eyes of the project team on whom it is performed
Purposes of Evaluation - Goals of the System:
- Four independent dimensions of success:
- The most straightforward dimension is the project’s efficiency in meeting both the
budget and schedule
- Another dimension, and the most complex, is that of customer impact/satisfaction
- A third dimension, again somewhat straightforward and expected, is business/direct
success
- The last dimension, somewhat more difficult and nebulous to ascertain, is future
potential
- Another primary purpose of evaluation is to help translate the achievement of the
project’s goals into a contribution to the parent organization’s goals
- To do this, all facets of the project are studied in order to identify and understand the
project’s strengths and weaknesses
- The result is a set of recommendations that can help both ongoing and future projects
- A successful project evaluation can help an organization:
- Identify problems earlier
- Clarify performance, cost, and time relationships
- Improve project performance
- Locate opportunities for future technological advances
- Evaluate the quality of project management
- Reduce costs
- A successful project evaluation can help an organization (cont.):
- Speed the achievement of results
- Identify mistakes, remedy them, and avoid them in the future
- Provide information to the client
- Reconfirm the organization’s interest in, and commitment to, the project
- Evaluation often makes recommendations that relate to ancillary, unplanned, but
important contributions to the project and its parent:
- Improve understanding of the ways in which projects may be of value to the
organization
- Improve processes for organizing and managing projects
- Provide a congenial environment in which project team members can work creatively
together
- Ancillary goals

1 Sohel Rana, Assistant Professor, Dept. of Finance & Banking, RU

 - Identify organizational strengths and weaknesses in project-related personnel,
management, and decision-making techniques and systems
- Identify risk factors in the firm’s use of projects
- Improve the way projects contribute to the professional growth of project team
members
- Identify project personnel who have high potential for managerial leadership
The Project Audit:
- The project audit is a thorough examination of the management of a project, its methodology
and procedures, its records, its properties, its budgets and expenditures and its degree of
completion
- The formal report may be presented in various formats, but should, at a minimum contain
comments on some specific points
- Six parts of a project audit:
- 1. Current status of the project
- 2. Future status
- 3. Status of crucial tasks
- 4. Risk assessment
- 5. Information pertinent to other projects
- 6. Limitations of the audit
- It is far broader in scope than a financial audit and may deal with the project as a whole or any
component or set of components of the project
Depth of the Audit:
- Time and money are two of the most common limits on depth of investigation and level of detail
presented in the audit report
- Accumulation, storage, and maintenance of auditable data are important cost elements
- Two often overlooked costs are the self protective activity of team members during an audit,
and the potential for project morale to suffer as a result of a negative audit
- There are three distinct and easily recognized levels of project auditing:
- General audit - normally most constrained by time and resources and is usually a brief
review of the project touching lightly on the six parts of an audit
- Detailed audit - usually conducted when a follow-up to the general audit is required
- Technical audit - generally carried out by a qualified technician under the direct
guidance of the project auditor
Timing of the Audit:
- The first audits are usually done early in the project’s life
- Early audits are often focused on the technical issues in order to make sure that key technical
problems have been solved
- Audits done later in the life cycle of a project are of less immediate value to the project, but are
more valuable to the parent organization
- As the project develops, technical issues are less likely to be matters of concern
- Conformity to the schedule and budget become the primary interests
- Management issues are major matters of interest for audits made late in the project’s life

2 Sohel Rana, Assistant Professor, Dept. of Finance & Banking, RU

 - Postproject audits are often a legal necessity because the client specified such an audit in the
contract
Construction and Use of the Audit Report:
- The information should be arranged so as to facilitate the comparison of predicted versus actual
results
- Significant deviations of actual from predicted results should be highlighted and explained in a
set of footnotes or comments
- Negative comments about individuals or groups associated with the project should be avoided
- Information that should be contained in the audit report:
1. Introduction
2. Current status
3. Future project status
4. Critical Management issues
5. Risk Analysis
6. Caveats, Limitations, and Assumptions
Responsibilities of the Project Auditor/Evaluator:
- First and foremost, the auditor should “tell the truth”
- The auditor must approach the audit in an objective and ethical manner
- Must assume responsibility for what is included and excluded from consideration in the report
- The auditor/evaluator must maintain political and technical independence during the audit and
treat all materials as confidential
- Steps to carry out an audit:
- Assemble a small team of experienced experts
- Familiarize the team with the requirements of the project
- Audit the project on site
- After the completion, debrief the project’s management
- Steps to carry out an audit (cont.):
- Produce a written report according to a prespecified format
- Distribute the report to the project manager and project team for their response
- Follow up to see if the recommendations have been implemented
The Project Audit Life Cycle:
- Like the project itself, the audit has a life cycle composed of an orderly progression of well-
defined events:
- Project audit initiation
- Project baseline definition
- Establishing an audit database
- Preliminary analysis of the project
- Audit report preparation
- Project audit termination
Essentials of an Audit/ Evaluation:
- For an audit/evaluation to be conducted with skill and precision, and to be generally accepted
by senior management, the client and the project team, several conditions must be met:

3 Sohel Rana, Assistant Professor, Dept. of Finance & Banking, RU

 - The audit team must be properly selected
- All records and files must be accessible
- Free contact with project members must be preserved
The Audit/Evaluation Team:
- The choice of the audit/evaluation team is critical to the success of the entire process
- The size of the team will generally be a function of the size and complexity of the project
- For a small project, one person can often handle all the tasks of an audit, but for a large project,
the team may require representatives from several areas
- Typical areas that may furnish audit team members are:
- The project itself
- The accounting/controlling department
- Technical specialty areas
- The customer
- The marketing department
- Purchasing/asset management
- Human resources
- Legal/contract administration department
- The main role of the audit/evaluation team is to conduct a thorough and complete
examination of the project or some prespecified aspect of the project
- The team must determine which items should be brought to management’s attention
- The team is responsible for constructive observations and advice based on the training
and experience of its members
Access to Records:
- In order for the audit/evaluation team to be effective, it must have free access to all information
relevant to the project
- Most of the information needed will come from the project team’s records or from various
departments such as accounting, personnel, and purchasing
- Some of the most valuable information comes from documents that predate the project
- Examples of documents that predate the project:
- Correspondence with the customer that led to RFP
- Minutes of the project selection committee
- Minutes of senior management committees that decided to pursue a specific area of
technical interest
- Priorities must be set to ensure that important analyses are undertaken before those of lesser
importance
Access to Project Personnel and Others:
- There are several rules that should be followed when contacting project personnel
- Care must be taken to avoid misunderstandings between the audit/evaluation team and project
team members
- Project personnel should always be made aware of an in- progress audit
- Critical comments should be avoided
- At times, information may be given to audit evaluation team members in confidence

4 Sohel Rana, Assistant Professor, Dept. of Finance & Banking, RU

 - Discreet attempts should be made to confirm such information through non-confidential
sources
- If it cannot be confirmed, it should not be used
- The auditor/evaluator must protect the sources of confidential information
Measurement:
- Measurement is an integral part of the audit/evaluation process
- Performance against planned budget and schedule usually poses no major measurement
problems
- Measuring the actual expenditure against the planned budget is harder and depends on an in-
depth understanding of the procedures used by the accounting department
- It is a very difficult task to determine what revenues should be assigned to a project
- All cost/revenue allocation decisions must be made when the various projects are initiated
- The battles are fought “up front” and the equity of cost/revenue allocations ceases to be so
serious an issue
- As long as allocations are made by a formula, major conflict is avoided-or at least, mitigated
The Auditor/Evaluator:
- Above all else, the auditor/evaluator needs “permission to enter the system”
- If the auditor maintains a calm, relaxed attitude, the project team generally begins to extend
limited trust
- The first step is to allow the auditor qualified access to information about the project
- The auditor/evaluator should deal gently with information gathered, neither ignoring nor
stressing the project’s shortcomings
- Recognition and appreciation should be given to the project’s strengths
- If this is done, trust will be extended and permission to enter the system will be granted
- Trust-building is a slow and delicate process that is easily thwarted
The Varieties of Project Termination:
- A project can be said to be terminated when work on the substance of the project has ceased or
slowed to the point that further progress is no longer possible
- There are four fundamentally different ways to close out a project: extinction, addition,
integration, and starvation
Termination by Extinction:
- The project may end because it has been successful and achieved its goals
- The project may also be stopped because it is unsuccessful or has been superseded
- A special case of termination by extinction is “termination by murder” which can range from
political assassination to accidental projecticide
- Two important characteristics of termination by murder are the suddenness of project demise
and the lack of obvious signals that death is imminent
- When a decision is made to terminate a project by extinction, the most noticeable event is that
all activity on the substance of the project ceases
Termination by Addition:
- If a project is a major success, it may be terminated by institutionalizing it as a formal part of the
parent organization

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 - Project personnel, property, and equipment are often simply transferred from the dying project
to the newly born division
- The transition from project to division demands a superior level of political sensitivity for
successful accomplishment
Termination by Integration:
- This method of terminating projects is the most common way of dealing with successful
projects, and the most complex
- The property, equipment, material, personnel, and functions of the project are distributed
among the existing elements of the parent organization
- In general, the problems of integration are inversely related to the level of experience that the
parent or client has had with:
- the technology being integrated
- the successful integration of other projects, regardless of technology
- A few of the more important aspects of the transition from project to integrated operation that
must be considered:
- Personnel - where will the team go?
- Manufacturing - is the training complete?
- Accounting/Finance - have the project’s account been closed and audited?
- Engineering - are all drawings complete and on file?
- Information Systems/Software - has the new system been thoroughly tested?
- Marketing - is the sales department aware of the change?
Termination by Starvation:
- This type of project termination is a “slow starvation by budget decrement”
- There are many reasons why senior management does not wish to terminate an unsuccessful or
obsolete project:
- Politically dangerous to admit that one has championed a failure
Terminating a project that has not accomplished its goals is an admission of failure
When to Terminate a Project?
- Some questions to ask when considering termination:
- Has the project been obviated by technical advances?
- Is the output of the project still cost-effective?
- Is it time to integrate or add the project as a part of regular operations?
- Are there better alternative uses for the funds, time and personnel devoted to the
project?
- Has a change in the environment altered the need for the project’s output?
- Fundamental reasons why some projects fail to produce satisfactory answers to termination
questions:
- A project organization is not required
- Insufficient support from senior management
- Naming the wrong person as project manager
- Poor planning
- These and a few other reasons, are the base cause of most project failures

6 Sohel Rana, Assistant Professor, Dept. of Finance & Banking, RU

 - The specific causes derive from these fundamental issues
The Termination Process:
- The termination process has two distinct parts
- First is the decision whether or not to terminate
- Second, if the decision is to terminate the project, the decision must be carried out
The Decision Process:
- Decision-aiding models for the termination decision fall into two generic categories:
1. Models that base the decision on the degree to which the project qualifies
against a set of factors generally held to be associated with successful projects
2. Models that base the decision on the degree to which the project meets the goals and
objectives set for it
- Just as the decision criteria, constraints, weights, and environmental data are unique to each
organization, so are the specifics of using any decision model
The Implementation Process:
- The actual termination can be planned and orderly, or a simple hatchet job
- Special termination managers are sometimes useful in completing the long and involved process
of shutting down a project
- The primary duties of the manager in charge of termination can be encompassed in nine general
tasks
- Duties of the termination manager:
- Ensure completion of the work, including tasks performed by subcontractors
- Notify the client of project completion and ensure that delivery is accomplished
- Ensure that documentation is complete including a terminal evaluation of the project
deliverables and preparation of the project’s Final Report
- Clear for final billings and oversee preparation of the final invoices sent to the client
- Duties of the termination manager (cont.):
- Redistribute personnel, materials equipment, and any other resources to the
appropriate places
- Clear project with legal counsel or consultant
- Determine what records to keep
- Ascertain any product support requirements, decide how each support will be delivered,
and assign responsibility
- Oversee the closing of the project’s books
- Most project managers delay the personnel reassignment/release issue as long as possible for
three main reasons:
- 1. A strong reluctance to face the interpersonal conflicts that might arise when new
assignments and layoffs are announced
- 2. Worry that people will lose interest and stop work on the project as soon as it
becomes known that termination is being considered
- 3. Concern that team members will try to avoid death by stretching out the work as far
as possible

7 Sohel Rana, Assistant Professor, Dept. of Finance & Banking, RU

The Final Report - A Project History:
- The final report is the history of the project
- It is a chronicle of the life and times of the project, a compendium of what went right and what
went wrong
- The required information is contained in the master plan, all project audits, and evaluations
- The precise organization of the report is not of great concern; the content is
- Several Subjects should be addressed in the final report:
- Project performance
- Administrative performance
- Organizational structure
- Project and administrative teams
- Techniques of project management
- For each element covered in the final report, recommendations for changing current practice
should be made and defended
- Equally important are comments and recommendations about those aspects of the project that
worked unusually well
- The fundamental purpose of the final report is to improve future projects

8 Sohel Rana, Assistant Professor, Dept. of Finance & Banking, RU