Wednesday, March 28

Shedding light on Budvar, (part 3); The cheapest audit in town


another Freedom of Information request to the Ministry of Agriculture. You can see my questions and the answers in the attachment. While I appreciated again the Ministry's readiness to comply with the FOI law, the answers give rise to some concern.

The tender which HZ Consult won does not seem to me to be suitable for the choice of a service which depends on the quality of the people who provide the service (as opposed to a tender for a commodity such as stationary or telecoms services). We are told that 70% of the criteria "points" were awarded for the price of the services. The nature of the service is that a group of people each with a certain salary spend a certain amount of time completing a task. The only way one company can be cheaper than another therefore is if they complete the task more quickly or if their people earn less money. But auditing is a competitive business. More expensive firms must provide a better service, or they will simply not survive. How has the ministry ensured that a cheap service will deliver sufficient quality? In fact when one reads what the remaining 30% of the criteria points are for, one sees no reference to quality parameters at all. But what we do see is that HZ Consult met all the conditions virtually perfectly. 99%! Wow!

When we consider the fees they will charge for the Budvar audit, we can see that they won because they are indeed very cheap. It is normal for an audit team to have several hourly rates reflecting the different levels of seniority and experience within the team. According to my friends in the auditing business, a typical rate for a good Czech audit company (i.e not one of the big international names) would be 1500-2000CZK/hour, with the lowest rate at 1,000CZK/hour, but the team leader might cost as much as 6,000CZK/hour. But not at HZ Consult. They offer the Czech taxpayer great savings, with a rate of only 380CZK/hour!

Now, please do not think that 380/hour is the salary of the individual. In that 380CZK is the brutto salary, then the employer social charges; and then an amount for the company's overheads and profit for the work. I am told that this amount would be between 100% and 200% of the total labour charge. Let us be generous and assume the lower 100% figure applies to HZ Consult. This means that the brutto salary is 140CZK/hour. Based on the standard of 1600 working hours per year, this means that the salary of the HZ Consult auditor is just 18,700CZK/month! For the most junior, and the most senior member of the team...

A further puzzle is the stated upper limit of 195,000CZK on the fee. This implies a total of 513 working hours to complete the audit. It was also reported in Hospodarske noviny that the team consists of 15 people. That means that the audit should be completed in 34 hours, or less than one working week. My understanding is that the audit started on 15th February and as of the time of writing, five weeks later, it is still going on.

I asked the Ministry for details of the other audits HZ Consult have completed under the current contract. There have been seven other audits; the Ministry clearly states that in all cases, there is one hourly rate of 380CZK, and that HZ Consult has not picked up other more lucrative work from the Ministry. It is also peculiar that several of the audits involved much larger numbers of hours than was planned for in the Budvar case. Why did the audit company agree to such a low number of hours for Budvar, and then agree to work many more hours for no extra money?

Dear reader, you may well work in an agency or a consultancy yourself. You know about working by the hour. Your hourly rate must cover the costs of all of your business; and if the client does not pay all the hours you actually work, you are losing money on the work. Is it really possible that HZ Consult's people earn less than a secretary at KPMG? Are they really prepared to work five times more hours than was agreed with the Ministry? A lot of this work is being done in Ceske Budejovicka. So what about travel and accommodation costs? Perhaps they all sleep in some illegal "ubytovna' like the one near my house in Divoka Sarka!

Ask yourself the following questions dear reader...

If you were the owner of an auditing company, would you accept these financial terms for such group of audits? If so, why?

And would you entrust a complicated audit of a large company, under the gaze of a sceptical public, to a group of people earning 18,700CZK/month?

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