Consider an Audit Perspective to Enhance and Validate an Asset Management Program

Stephen Harrison, Director of Asset Management/Interim Director of Internal Audit, California Water Service

For the past 11-months and through 2022, I have had the opportunity to lead our Company’s Internal Audit Department through a professional development and growth opportunity. Prior to this role, I was leading our Engineering Asset Management Team comprised of Engineers, SCADA Professionals, GIS/EAM Specialists, and Field Technicians. From a day-to-day asset management professional to an internal auditor, I agree, I would be scratching my head too! However, after jumping headfirst into the world of auditing there are some unique similarities between auditing and utility asset management. As I was pondering the relationship, I realized how internal auditing principle can complement an Asset Management Program. I hope my perspectives and experiences on the intersection of both worlds’ aid in assessing if an audit perspective to enhance and validate an Asset Management Program would fit in your organization.

To start off, both practices have one significant component in common; Risk Management. Internal Audit is chartered with providing an independent assessment of financial misstatement risk and effectiveness of internal controls to prevent errors through an annual risk assessment and performance testing of financial controls (reviews, approvals, and segregation of duties). Thanks to Enron and WorldCom, we call this Sarbanes-Oxley; commonly referred to as SOX Compliance. In terms of asset management, similar risk assessments are performed against physical assets to ensure they are meeting operating requirements and controls such as preventative maintenance, renewal, and replacement are implemented. The outcomes for both practices are annual plans to perform needed actions to reduce the risks, eliminate failures, and provide assurance of proper function. Let’s take this one step further into a practitioner viewpoint. In audit, the risk of a financial statement correctness is a function of the quantity/value of an account, how complicated the accounting transaction is (level of judgment), and the adherence to internal controls to prevent error. In asset management, this translates to the criticality of the asset, proper asset operation, and completion of maintenance and condition inspections to prevent failure. Remember, all of this is also built on the foundation of correct accounts/ledgers and asset attribute/hierarchy documentation. All in all, managing an asset management program and a SOX compliance program is not that far off! Let’s see if an audit perspective would enhance your asset management program.

“Committing to an audit will aid in compliance to maintain asset management plans and will support necessary resources when deviations are noted.”

Below are three audit perspectives, considerations, and tactical examples which can complement your asset management program. I identified and narrowed down to these three because I believe they have the best impact and benefit realization for programs of all sizes and aid in validating use of resources for asset reliability.

Make Routine Audits on Asset Management Practices Part of the Program – Consider building in routine auditing into the program vs. special audits that are performed as needed. There are many places to start regarding this consideration. Routine maintenance, asset hierarchy upkeep, replacement models, condition monitoring, etc. Outline your organizations’ areas of asset management practices and develop check-points across these areas. Using asset hierarchy upkeep as an example, randomly select assets and audit against the repository of attributes with the asset physically present. Alternatively, audit maintenance activities to check that the documentation and steps are being followed. Compare the results to either best practices or your organization’s policies/guidelines/SOPs. In general, committing to an audit will aid in compliance to maintain asset management plans and will support necessary resources when deviations are noted. Start small and garner buy-in from those impacted. I would be remised to not include an important change management action. Establish how the audit is to promote opportunities, recognize value, and validate the Asset Management Program effectiveness. Reinforce how the results are used to adjust practices as necessary and not get anyone in trouble.
Perform Process Walkthroughs – A basic auditing practice is to walkthrough processes with those who are both accountable and responsible for the output. This audit perspective and consideration gives the owners the opportunity to verbally discuss how they conduct business and actions related to asset management practices and goals. For those facilitating the walkthrough, an independent and non-bias viewpoint on potential opportunities and process enhancements generally are an outcome. Have a handful of open-ended questions ready to spark dialogue. Keeping with the asset hierarchy upkeep example, walkthrough the steps performed to acquire the info and update in your CMMS/EAM application. The walkthroughs dialogue between parties sparks action and supports ideas on how to move up the asset management maturity scale and address challenges which are discussed. Lastly, as an added bonus and opportunity, consider developing complementary flow charts to document the discussed process.
Leverage Your Internal Audit Department – A unique characteristic of an organization’s audit department is that it maintains a level of independence to internally certify practices and procedures. As such, many Audit Departments allocate time to perform audits on operational practices in addition to financial transactions. If your company has an audit department, reach out and talk with them on how to both design and facilitate an audit program related to asset management practices. Establishing assurances around asset management can significantly support and validate the importance the program provides. In many cases, an organization’s Asset Management programs do not get the credit they deserve. In my opinion, this is because of the complexity of the program, outcomes, metrics, and reliability is not easily consumed/understood by non-practitioner and the 1 percent of failures garners the attention vs. the 99 percent of assets functioning reliability. A similar example is ESG Assurance. Many Audit Departments are being tasked with developing ESG assurances with the emerging regulations around these topics. With some States’ implementation laws requiring Asset Management reporting, similar assurance requirements may not be far off.

I sincerely hope this short, but pointed article, generates thoughts and considerations on how to use an audit perspective to enhance and validate the performance, maturity, and importance of your asset management program. Here is the final consideration. You can report on preventative maintenance completion in terms of percentage complete or incorporate an audit perspective/approach and report/certify that the preventative maintenance program is designed and performing effectively to meet reliability and risk mitigation targets/goals/compliance. To close, one major observation I have had transitioning into the audit role is how audit is negatively perceived. The word AUDIT has become associated with tension and fear. Give your audit team a chance to help you and know we are out to ensure small errors do not become major issues and opportunities exist.