Johnson & Johnson Industries' capital-asset procurement policy requires the board of directors (BOD) approve any single acquisition over $500,000. If the BOD approves a project, then the treasurer will transfer the funds to the respective plant. Within one year, the internal auditing function is charged with reviewing each acquisition to check the propriety of the purchase and disbursal of funds.

Johnson & Johnsons Industries plant controller prepared the first proposal for a DEK cutting machine. Other plants were told to wait until internal auditing could inspect the documentation associated with the acquisition and evaluate the project's operating effectiveness and efficiency. The plant's proposal was the second-largest proposal ever submitted in the company's history and it totaled $1.3 million dollars. The cost of the new machine by itself was listed in the proposal at $1.1 million. Labor and other costs necessary to remove the old machine and install the new machine totaled $200,000.

The internal auditor assigned to the investigation was Phil Ramone. Phil had been with the company four years performing mostly production operational audits (on existing processes) and internal control payroll audits. Phil's considerable experience in these areas led him to believe that the procedures associated with this capital-asset audit would be as simple and routine. This was not Phil's first visit to the plant. In fact, Phil had performed an audit on the plant's payroll system only a year ago.

It was a long drive to the plant so when Phil arrived a little late the day of his audit he was greeted by the controller with a perceived air of indifference and promptly led to a secluded office. The controller calmly explained that he was extremely busy and would not be available until the end of the day. Phil merely nodded his head and sat down in front of several tall piles of invoices, which the controller stated was the documentation supporting the purchase, set up, and testing of the new machine. Phil was somewhat surprised, fully expecting to see only a handful of invoices. As Phil began looking through the myriad of statements and canceled checks, he soon found one invoice near the top of the first pile that indicated the actual price paid for the machine itself was only $850,000.

Phil decided to call the VP of Operations at corporate headquarters. Phil was critical of the plant controller when describing the seriousness of his suspicions based on this preliminary information. Phil did not know that there was a BOD meeting that day and that the news would be passed on to them. The members of the BOD were outraged, screaming over the alleged misuse of the funds and possible fraud. Phil was unaware that in a private conference call the chairman of the BOD would soon lambast the plant controller. Seconds after the call, the controller walked up to Phil and had only two words to say - "get out."

Three days later Phil was called in to the CAE's office. The CAE described how he personally went to the plant the next day after Phil's visit and performed the capital-asset audit himself. As it turned out, the controller of the plant did a commendable job in overseeing the project and keeping accurate records of the disbursements. In fact, the controller created a specialized installation guide that will probably save the company hundreds of thousands of dollars when the remaining plants order more of these machines.

What should Phil have done differently?You should think about the entire audit process.