Asset Verification Framework
Who Says We Need to Verify an Asset?
IPSAS is silent on verification but it does require assets to be impaired if the functionality has decreased by a material amount. Thus if an asset is missing, it is impaired. More specifically, IPSAS makes the following requirement on organizations:
IPSAS 17(67): The residual value and the useful life of an asset shall be reviewed at least each annual reporting date and, if expectations differ from previous estimates, the change(s) shall be accounted for as a change in an accounting estimate in accordance with IPSAS 3…
IPSAS 21(26): An entity shall assess at each reporting date whether there is any indication that an asset may be impaired.
IPSAS recognizes two constraints, materiality and the benefit/cost of doing an activity. More specifically:
IPSAS 1(Appendix A): The balance between benefit and cost is a pervasive constraint. The benefits derived from information should exceed the cost of providing it. The evaluation of benefits and costs is, however, substantially a matter of judgment. Furthermore, the costs do not always fall on those users who enjoy the benefits (emphasis added). Benefits may also be enjoyed by users other than those for whom the information was prepared. For these reasons, it is difficult to apply a benefit-cost test in any particular case. Nevertheless, standard setters, as well as those responsible for the preparation of financial statements and users of financial statements, should be aware of this constraint.
Physical verification was traditionally the best way to ensure an asset exists (e.g. go and kick the asset). However, what happens when the asset is intangible, there are thousands of them or is in a hot room of a nuclear reactor? This is an ongoing challenge for most organizations and the IAEA is no exception.
The Asset Verification Framework to the Rescue!
To solve this problem, the author implemented an earlier version of the Asset Verification Framework in the IAEA in 2011. The basis for the framework is the principle that internal control efficiency and reliability is a function of standardization and automation. The more standardized or automated an internal control – the more reliable it is.
A 2×2 matrix maps these two functions. Different asset verification methods can be plotted onto the matrix with the top right quadrant (high standardization/high automation) being the sweet spot. This is not to say the other quadrants should be empty though; they are still important as quality assurance methods.
The 90-9-1%+Data Mining allocation is inspired from a similar Social Media rule of thumb. In this context, 90% of the social media users will never create content, 9% will contribute to existing content but only 1% will actually create content. Extended to the asset verification context:
- 90% of the verification activities should be via highly standardized and automated means
- 9% of the verification activities will contribute to the confidence of the automated functions.
- 1% of the activities should be used to audit the other 99%
- Data mining is not an internal control but can be used to discover the ‘unknown-unknowns’ about how the organization buys, uses and manages assets.
The Benefits of a Good Verification
Asset verification is an internal control measure which in turn is a measure to ensure that an organization’s activities are congruent with an organization’s objectives. Ideally, the more information that can be collected concurrently the better. Thus, asset verification should be used to accomplish the following:
- EXISTENCE: confirm the existence and to the extent possible evaluate the condition of the asset for impairment (a central tenet to IPSAS 17.67 noted above).
- RECORD MAINTENANCE: Use the resulting count to update the Fixed Asset register for data collected. Update secondary asset information collected in the course of the verification such as custodian, location and need for impairment.
- PROCESS IMPROVEMENT: Use the results of the verification to monitor for other internal control or management issues; for example, missing assets may highlight other organizational or personnel issues worthy of investigation.
Seven Examples of Asset Verification Methods
1. External Auditor Verification
Description: Designated individuals (which may include an internal or external auditor) count all or a sample of the assets.
Operational Comments: This is an expensive proposition that may be time-consuming if the individuals are unfamiliar with the organization’s physical environment and assets. Coordination with Management and staff is critical (to at least get the list of assets to count!).
Financial Reporting Considerations: This method provides the greatest separation of duties between those holding, recording and counting the asset. Nevertheless, unless conducted carefully, this method may be error prone providing false negative results of missing assets due to lack of organizational and site familiarity. This method should be used to verify the accuracy and reliability of other methods.
2. Central Asset Group Verification
Description: Verification is completed by the central asset group who count all or a sample of the assets.
Operational Comments: Verification may be part of the normal operations or functions of the central asset group. Exceptional or ad hoc verification may be needed to support large organizational changes (department mergers, moves). Verification may be done en masse, ad hoc or in staged approach. For example, there may be a two or three-year rolling cycle in which every asset is counted. Supporting technology ranges from manual reports, bar code readers, Radio Frequency IDs, etc..
Financial Reporting Considerations: .
This method provides an excellent level of assurance as the asset group generally is familiar with the assets, the custodians and their locations. However, as this method involves the holder of the asset record counting the asset, a 3rd party sample is required to verify count accuracy.
3. Asset Functionality Verification
Description: Verification via the on-going functionality of the asset or system for which the asset is an integral component. Thus, a sensor reading air quality (and the system supporting it) must exist if the organization is receiving air quality readings. Typically applicable to computer or technology based assets, this method provides an adequate level of assurance where other means are prohibitively expensive, dangerous or not permitted.
Operational Comments: Once the systems are in place, this can be an inexpensive method as it can be integrated into the normal operations of the assets. However, the method may not be able to validate the existence or impairment of seldom used or back-up systems.
Financial Reporting Considerations: The Financial Statements may note where Functional Verification is used and what is number and value of these assets. If monitoring includes the condition and status of the system or asset, this assists in the asset impairment.
Description: Verification is completed by the custodian of the asset ideally electronically. For example, when a staff member is hired, changes position, location, etc.; he or she receives an email. The email lists the assets for which they are responsible and asks them to verify that they are still the custodian and holder of the asset. The condition of the asset could also be included in the email. A yearly or periodic verification (e.g. as part of the performance review process) can also be done.
The staff member may also be asked to look for assets in their custody which are ‘not on the list’. Thus this method allows for proactive discovery of misplaced assets.
Operational Comments: An inexpensive and highly reliable method to conduct asset verification and impairment assessments – IF effective information systems exist to support the verification process. It is critical that clear, unambiguous custody of assets is communicated to the staff members. As well, there must be clear transfer events and workflows for when the asset enters or leaves the custody of a staff member.
This method may also be required or controlled by statute or regulation for certain types of assets. For example to monitor the issue of firearms.
Financial Reporting Considerations: As this method involves the holder of the asset counting the asset, a 3rd party or central asset group validation is required to verify the accuracy of the method. This is also a method to pro-actively declare lost or impaired assets that would otherwise be considered immaterial.
5. Supervisor Verification
Description: Similar to self-verification, the supervisor of the asset’s custodian is required to certify the an employee’s assets exists and that they are not impaired. Depending upon the technology used, this is slightly to moderately more expensive than self-verification by itself because of the need to train and coordinate two (or more) individuals. Nevertheless, this improves the reliability of the employee self-verification by having it checked by another responsible individual.
Operational Comments: This method may be integrated into an employee’s on-boarding, departure and performance review procedures.
Financial Reporting Considerations: Provides a good level of assurance assuming the verification consistently occurs and supervisors are adequately trained. Third party verification is still required to validate that the process and results are as expected.
6. Transaction Verification
Description: Verification is assumed to have occurred by the fact that the asset has had at least one transaction occurring over a defined time-period (e.g. the past fiscal year). For example, within a tool crib, a tool has been signed in or out at least once in the past month – it is assumed that the asset is still in the custody of the organization. This was a method of particular interest to the IAEA as they had assets that may be located anywhere in the world within remote nuclear facilities. The assets as a result, may only be returned to the Agency on an infrequent basis.
This method is inexpensive if effective information systems exist to support the verification process and is useful for assets that do not have a clear custodian or location (e.g. equipment from a pool or on loan).
Operational Comments: This method requires potentially costly exception follow-up for assets that have not appeared for more than one year. A limitation of this method is that it does not provide a completeness check. Thus, it only counts assets that are known to exist (come in through a tool crib window, etc.); not assets that are on the shop floor and are not accounted for.
Financial Reporting Considerations: This method provides an adequate level of assurance for assets that are of low to moderate value. However, the method should not be used for higher value assets or for a materially large pool of assets. This method requires process testing through other verification means, for example a sample of transacted-assets are confirmed at year-end to confirm validity of the process.
7. IT System Verification
Description: Electronic tagging and tracking of assets (e.g., network monitoring of computers, GPS tracking, RFID tags) to verify their location and existence. This technology was formerly expensive but becoming more affordable and can be highly effective and efficient for some assets but requires technology infrastructure.
Operational Comments:This method can be used for other operational requirements (e.g. monitoring desktop computer connected to the network) and it will provide a good level of assurance assuming the technology itself is stable and proven.
Financial Reporting Considerations: Requires sampling and secondary verification to ensure the technology continues to work and blind spots have not developed.