Background : A leading consumer goods industry in India, with a turnover of more than Rs.250 crores with activities spread across the country covering both the urban and rural markets, has been facing a downward trend in its sales along with rising marketing costs. Top management has been grappling with a changing consumer preference trend guided by the entry of a strong MNC competitor. Some major promoters and key marketing personnel have changed loyalties and have shifted to competition. The Board has been concerned about this disturbing trend and has been reviewing the strategies being adopted by the company to adapt to these changes and retain the earlier good performance. Audit Committee meeting held along with this Board Meeting focussed on this important business issue. The Audit Committee members felt that although a reasonable assurance is being provided by the internal audit team on adequacy of controls, a consulting focus needs to be adopted and some suggestions on improving the arketing efforts is required from the team. If required, outside help from Chartered Accountant firms could be taken, based on their experience in marketing area.

Methodology : The Chief Audit Executive (CAE) had been conducting marketing audits but primarily with a financial focus. His team consisted of chartered accountants or cost accountants. He felt the need to have the knowledge expertise of an MBA —Marketing who could provide a greater insight into market performance. He, therefore, approached an internal audit organisation (Chartered Accountant firm) who had the requisite expertise. However, he felt that the expertise should also be built into the in-house internal audit team, so that as and when required, a reasonable internal audit project could be undertaken by the in-house team. The CAE insisted the presence of a member of the internal audit team as the co-ordinator who shall be attached to the outside team of internal auditors.

The starting point was a compilation of the sales performance data for the company which was arranged — zonewise, district-wise, distributorwise, sales-executivewise, productwise. From secondary research — annual reports, visit to ROC, the published data on competitors was also obtained and compiled.

Major variations were analysed. Salesforce composition was studied and their average age profile and experience profile in the organisation and in other organisations prior to joining the organisation, was also gathered. The age profile of the distributor’s association and their geographical spread was analysed, identifying the distances and other logistic issues. Channel management system including appointment, credit management, order management and administration was gathered and flow-charted. The earlier audit reports in this area were obtained. Market survey reports on the performance was also gathered. Channel monitoring MIS was obtained.

On evaluation of all the data gathered, a detailed audit programme of dealer visits in select geographic regions, salesforce interviews, physical verifications, stock level management at the channel partners end, secondary sales analysis, analysis of visit reports, collection processes, scheme (for incentives and discounts) management was prepared.

The questionnaires for the interview were drafted and forwarded to all concerned and dates of interviews intimated. The logistics of travel and teams were arranged and communicated to all concerned.

Gist of major observations are given below :

  • Inadequate sales men in several regions though competitors had good market share.
  • There was direct co-relation between the falling market share of the company’s products in particular regions with low number of sales personnel for the same regions. There was also direct co-relation between the falling market share in particular regions and high turnover of sales personnel for the same regions.
  • High turnover of field sales personnel — This was due to the falling market share and attention not being paid by company to improving communications with salesforce on a regular basis.
  • Absence of proper monitoring of laid down policies by the field sales personnel. This was mainly due to improper monitoring of MIS sent by field sales personnel and absence of proper feedback on the same. This had resulted in field sales personnel getting lax and filing wrong/improper forms.
  • Field sales personnel were carrying on some other part-time work rather than working full-time on company’s work. This was a result of improper monitor-ing by Head of Marketing and decentralised Area Managers at various regions.
  • Salesmen not making adequate calls — Call analysis reports were filled in more as a routine rather than accurate data being sent to the company. On study-ing the call reports, it was found that many of them were wrongly filled and in some of them even the totals did not tally from month to month.
  • Salesmen fudging visit reports and travel reports. Visit reports were filed wrongly — this was brought out in surveys with dealers and retailers who gave in writing to the visiting internal audit team that there were no visits to them in last six months, though the same was being reported in the visit reports of sales personnel.
  • Distributors not stocking adequate levels. Distributors were not giving accurate sales figures in their respective statements submitted to the company. Secondary sales were shown less which resulted in company having data that the distributors were saddled with stocks whereas, the actual situation was that distributors had sold the stocks and had also collected the amounts from wholesalers/retailers. The dis-tributors went on pressurizing the company for more incentives/discounts, informing about their stock positions being high, though the actual situation was much different.
  • Inadequate coverage of the retail market — since in many regions there were demoralized sales staff — they did not undertake their Journey Cycle Plan (routine cycle of the market) with the distributor marketing personnel regularly and left much of the same to the distributor. Many retailers were thus not serviced regularly and retailers switched to the competitor products.
  • Schemes not reaching the end users — Distributors identified. Some schemes were introduced, like free oil sachets against the products, which never reached the end customers and were pilfered by the distributors who sold these sachets in cash. This was possible as the schemes were not announced properly in every region and also the main product on which the free oil sachet slogan was written could be erased out, as it was not printed but written later by sketch pens.
  • Collection in cash not registered as receipts — Sales personnel made cash collections from distributors who then did not make payments to the company. On reconciliations with distributors, they produced letters from sales person-nel that they had collected the money. These sales personnel had already left the company, and it was now difficult to pursue the same with sales personnel.

Recommendations :

Improve penetration — introduce stronger recruitment processes, training program-mes, improving policy implementation including a very strong analysis of all information received and immediate feedback for any corrective action, monitoring visit and travel reports, introducing stock levels for distributors and stockists with proper MIS to be received from the distributors/stockists and surprise verification of the MIS with actual situation, introduction of the MIS for secondary sales monitoring, scheme audits on a regular basis by internal audit, policy of not accepting cash, Palm-tops (hand held computers) for registering orders and receipts with customer acknowledgments noted in the Palm-tops.

Distributors were informed that no cash transactions were permitted by the company, and they would be giving the sales personnel money at their own risk.

Conclusion :

In one quarter, the sales showed an upswing and the Audit Committee appreciated the performance of the internal audit function. The Board acknowledged the multifaceted role that is increasingly being played by the internal audit and also cleared pending budgetary approvals for increased team strength and equipments.

1. Are up-to-date sales forecasts (by product where applicable) available that reflect the following elements ?

— unit volumes;

— revenue levels.

2. How does management ensure that sales targets are accurately rolled down to members of the sales team?

3. Are actual sales figures differentiated between in-house sales force, agents, distributors, etc. (and is each group separately monitored for performance and achievement of objectives)?

4. Are all actual sales activities accurately captured and incorporated into the appropriate information system?

5. How can management be sure that sales returns, cancelled orders, rejected orders, discounts and allowances are all correctly and accurately reflected in the sales performance statistics ?

6. Would management be made aware of sales staff not achieving targets or making wrong target reports ?

7. Is ‘sales performance’ assessed in any of the following ways, and if so, how are variations reported and reacted to ?

— selling costs as a percentage of total sales;

— sales personnel remuneration & other costs as a percentage of total sales;

— agent sales and commissions as a percentage of total sales;

— discounts given as a proportion of total sales;

— call success rates and average cost.

8. Are product development, marketing, promotional and advertising activities coordinated to actively support sales staff activities ?

9. Have mechanisms been established to reliably identify potential customers and marketing opportunities?

10. How does management ensure that data on sales activities (i.e. leads, confirmed orders, etc.) is accurate?

11. What mechanisms prevent the establishment of unauthorised, unlawful or uneconomic trading terms with a customer ?

12. How can management be assured that all sales staff are suitably experienced and demonstrate an accurate knowledge of company products and trading terms ?

13. What measures are in place to ensure that all sales leads are captured, trailed and accounted for ?

14. Are sales leads and transactions reported through the distributor/stockist network accurately captured, in compliance with the prevailing terms, and taken into account when allocating commission payments ?

15. Have authorised procedures been established and applied for determining and operating credit and trading limits ?

16. What mechanisms prevent established credit and trading limits being exceeded ?

17. What measures prevent the acceptance of orders where prices and/or dis-counts are outwith the authorised range ?

18. Have standard rates for sales staff expenses (i.e. mileage charges, hotel accommodation, subsistence, entertain-ing, etc.) been agreed, authorised and implemented?

19. What mechanisms prevent the payment of sales staff expenses claims that fall outside of the authorised rates ?

20. Are sales staff expense claims subject to scrutiny for validity and accuracy (and are they authorised for settlement) ?

21. Are sales territories and staff journeys optimised in relation to their operational base, so as to contain travel and over-ight accommodation costs ?

22. How can management be assured that payments of sales commission and bonus are accurate, based upon actual sales achievements, correctly calculated, and authorised ?

23. What mechanisms prevent the payment of invalid or unauthorised expenses, commissions and bonuses ?

24. How does management maintain an awareness of all customer complaints/comments, and how can they be certain that such queries are effectively dealt with ?

25. How are secondary sales information and information on distributor out-standings collated, verified and acted upon ?

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November 2020