Introduction:
A computer vendor with multi-national presence noticed international service revenues appeared lower than they ought to have been. Initially, this was more of a vague feeling than anything anyone could substantiate since there had been no sudden drop in the revenue stream. Service revenues, and margins in particular, appeared to be much lower than the installed base in each country would indicate.

Then, the financial comptroller in one of the countries resigned. Again, while nothing was proven or substantiated, vague suspicions floated around.

Finally, management requested the internal audit group to investigate matters and settle the issue permanently.

Background:
The system architecture of the product offerings was rather unique and the company’s service structure maximally exploited its features. Finding it could not get the features it wanted in a commercially available call-management system, the service organization created one internally. Similar considerations led to creating a billing system with some rather unique characteristics.

Instead of using relational database technology, all customer records were essentially in text form. Each device under a maintenance agreement at each site had one data record per device that held, among other data:

• Quantity of the device under agreement
• Applicable monthly maintenance charge
• Applicable discount rate
• Total monthly maintenance charge

When a customer changed the number of devices under agreement, service admin staff went into the database after manually calculating the new charge and modified the text record to reflect current conditions.

The service staff was quite dedicated and spent much time keeping this massive information updated. Each month, an admin rep would compare the previous months billing with the proposed current month’s billing and verify all changes. This was a tedious process involving manually scanning and comparing a massive printout of the previous month’s billing and a similarly massive printout of the proposed current month’s billing. They were busy and dedicated for much of the time.

The audit process:
When the (internal) auditors learned how the system operated, they tried coping with the data deluge by picking a country and taking a month’s service billing apart. Given the billing system had no automated (and hence, reliable and auditable) billing calculations, the auditors sat with the listings, a ruler, desk calculator, and a note pad to re-calculate each billed line item and noted discrepancies for later review. The sheer volume made a total audit impossible; they were able to check less than 20% of the smallest country’s billing in three weeks. They did find some discrepancies in the records they did check. Extrapolating their findings to estimate total billing made an insignificant improvement to the revenue picture.

They realized they needed help and requested it.

In response to their call for assistance, management looked around for someone combining a systems and business background with operational experience and in-depth knowledge of the service business. They charged Roy Sequeira with helping the auditors conduct the audit in a timely manner.

Audit automation:
After spending a day studying the current audit process, Roy realized it would not meet the situation’s needs. He had to automate the audit process as much as possible and manually investigate only discrepant items. He designed a process that met his criteria and found IS had no resources available to help him. All they could to help was give him access to the monthly billing text file.

The semi-automated process did the following:
Using the original billing text file as a source

• Parse the text file and create a relational database with the data from the text file
• Compute each data line using stated discounts and the maintenance list price
• Compare the computed line item total to the original billing text file total
• Compare the computed site total to the billing text file site total
• Again compute each data line, this time without any discounts other than for pre-payment
• Compare the computed line item total to the original billing text file total
• Compare the computed site total to the billing text file site total
• Store all discrepancies in a second relational database for further processing

Then, using the “discrepancy” database as source:

• Determine the difference between actual line item amount billed and computed line item amount billed
• Determine the difference between actual site total charge and computed site total charge
• Generate reports for audit investigation

When the auditors and management were satisfied that this process did what it claimed to do – verify 100% of all line items and totals - Roy and the auditors ran the previous months billing text through the process. The longest run for the biggest country took eight minutes; the shortest run took a minute and a half. Quite an improvement on a 20% spot check that took 3 weeks of eight-hour days ( 90 seconds vs.120 hours.)

Audit findings:
The audit revealed there was a $4.1M difference between annual actual billings and recomputed total annual billing. Since current billing was $12 M annually, this was a very significant difference and got everyone’s attention.

A detailed scrutiny of each discrepant line item showed:

• There was no fraud involved
• Sales reps gave extensive service discounts to clinch sales, sometimes giving service away for free for a year or two
• Other than discount amount, there was no information transfer between finance & admin processing sales orders and service billing
• Consequently, service billing did not terminate discounts when they should have
• These erroneous practices had been going on for many years

Recommendations and follow up:
The audit team made the following recommendations:

• Replace the service billing system with a commercially available and fully auditable billing system
• Include sales of service in each sales quota
• Have Sales reimburse Service for the cost of good sold (COGS) of all service giveaways
• Write off the lost amounts since back-billing all customers for the discrepant amounts would trigger severe customer backlash
• Send a letter to each affected customer explaining there had been billing errors in their favour in the past and that subsequent billing would reflect corrected charges.

Until the replacement billing system could be installed, Roy created and implemented the following processes in each country:

• Created a record of all service discounts and “giveaways” including the period
• Have service management sign off on all new service discounts and giveaways
• Run the automated audit each month and have local service management verify each discrepant line item and total against the discount and giveaway list

Results:
International service revenues swiftly climbed to the $16.1 M level. When customers realized how much they had benefited in the past, adverse reaction to the corrected charges was minimal and muted. There was no resulting maintenance contract attrition.

Summary:
Since there was virtually no added overhead, all the $4.1 M in increased revenues flowed straight to the bottom line.

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