Corporate Finance

Changing Attitudes at Cargill

Overhauling internal audit earns Cargill its first REACH Award.
Kris FrieswickJanuary 1, 2000

Category Winner:

* Internal Audit

Cargill Inc. finance executives willingly admit that the company’s internal audit department wasn’t particularly effective back in 1991. The Minneapolis-based manufacturer of agricultural, food, financial, and industrial products had only one corporate-level audit committee, in the United States, and had separate audit departments in the United States, the United Kingdom, Canada, Brazil, Argentina, and Singapore. There were no corporatewide auditing standards. Auditor turnover topped 25 percent, and business units had little respect for the function.

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“Most of the audits were done by junior people,” says Galen Johnson, corporate controller at Cargill, one of the largest closely held U.S. companies, with $55 billion in revenues. “As a result, the managers often felt they were teaching the auditors about the business.”

Three events prompted change. The first was the 1989 appointment to CFO of Robert Lumpkins, who promptly issued a mandate to make Cargill’s finance function world-class. Then, the 1991 promotion of Johnson to worldwide audit director (a position he held until last August) brought in the business knowledge necessary to fix internal audit. Finally, in 1992 the company changed its governance structure and introduced outside directors, who provided the corporate-level endorsement for reengineering.

“The outside directors brought more-classic notions about the nature of an audit committee’s role,” says Lumpkins, who is also vice chairman and president of Cargill North American. One of those notions, says Scott Van Orsdel, worldwide audit manager for policies and procedures, was “to really oversee the internal audit functions.”

Ultimately, these forces enabled Cargill to combine its far-flung audit groups into one global team focused on the elimination of control breakdowns. And the effectiveness of Cargill’s reengineering earned the company its first REACH Award, this year.

First, Clean House

Armed with Lumpkins’s mandate and the new audit committee’s support, Johnson spent nine months in 1992 quantifying internal audit’s problems. He interviewed audit customers, the audit committee, and members of the audit team. He benchmarked against other multinationals, such as Honeywell and 3M, and dissected their methods.

But creating a unified, worldwide internal audit required some housecleaning. “It was a transition from inexperience to experience,” says Kim Lattu, Cargill’s worldwide asset-based audit manager. Instead of laying off people, she says, “we moved people to other departments and brought people back into audit who had business experience.”

Johnson next focused on solidifying audit’s independence. To do that, the department was reorganized so that all auditors report to one worldwide audit director, who, in turn, reports to the corporate audit committee.

With the new structure in place, Johnson targeted the audit process itself. Before reengineering, every business unit underwent a comprehensive audit according to a location-based schedule. A given unit might be audited once every three years, or three times in the same year. More troubling, he adds, was that “we were auditing activities that had little impact. We decided to limit our activities to areas that had a material impact or a high risk.”

The result was a risk-based audit criteria that includes a $5 million materiality threshold. Audit targets are assigned a risk category, ranging from level 1 (highest) to level 7 (lowest), and every six months audit recommendations are made based on those risks. Johnson assigns “representative” auditors to individual units to serve as “our eyes and ears in the field.”

Internal audit also altered the way it conducts audits. Rather than look for problems after they occur, the team now examines the control systems in place to prevent problems. Some units receive increased attention, while many that were once frequent audit targets have been dropped completely. For example, says Van Orsdel, “[Internal audit] used to go crazy over payroll.” The team realized, however, that the best control mechanism in a payroll process is the employees, who have a vested interest in the accuracy of their checks. So, the team no longer routinely audits payroll. In contrast, the company’s financial services and trading business now has a dedicated internal audit department because “it has the highest business risk.”

That fact was driven home this fall when Cargill felt the impact of the financial crises in Russia, Asia, and Latin America. Cargill’s first-quarter earnings (ended August 31, 1998) fell a reported 96 percent, to $4 million, down from $93 million during first-quarter 1997. Despite this hit, Johnson believes financial services did its job. “That sort of risk doesn’t show up in your risk profile,” he says of the Russian market crash. “Russia was the ultimate worst-case scenario that wasn’t factored into any kind of risk system. We thought we were properly hedged, and we were within our risk limits. But when a government doesn’t honor its commitments, that’s just not expected.”

Enter Technology

New technology is key to Cargill’s ability to monitor internal controls. “We used to have the old foldout ledger paper and we would do our worksheets and audit documentation and put them in a big binder,” says Pete Huberty, worldwide audit manager-IT. Over the past five years, however, Cargill has embraced technology, with a global-area network that allows employees to access any computer system in the company from anywhere in the world.

The backbone of the system is a software program called Auditor Assistant, developed by First Chicago NBD Corp. and WordLink (now Norstan Consulting), a technology provider based in Champaign, Illinois. The system provides all documentation, reports, and workflow for the auditing procedure, including a project checklist and scope page.

The company’s investment in technology, such as virtual phone numbers and global network access, allows much of an audit to be conducted remotely. As a result, travel time has fallen to 25 to 40 percent, and 25 of the company’s 80 auditors (including Johnson) work from home an average of two days a week.

Overall, Cargill’s reengineering has reduced the audit staff from 4.61 FTE per billion dollars of revenue in 1993 to 2.73 FTE today. In that same time, revenues have jumped from $47.4 billion to $55 billion.

Although the numbers are impressive, audit managers gauge their success through feedback from customers, employees, and the audit committee. “We get a lot of people asking, ‘How much time will you give me?’ and not, ‘How long are you going to be here?’” says Lattu.

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