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A REPORT PREPARED FOR

Confidential

SOUTH METROPOLITAN REGIONAL COUNCIL


Internal Audit of:

Sales and Marketing


16 November 2011

SOUTH METROPOLITAN REGIONAL COUNCIL


Internal Audit of: Sales and Marketing

Table of Contents
1 Executive Summary ............................................................................................... 1 1.1 1.2 1.3 1.4 1.5 1.6 1.7 2 Introduction ................................................................................................... 1 Objectives and Scope ..................................................................................... 1 Inherent Limitation ......................................................................................... 2 Summary of Observations and Recommendations ............................................ 2 Opinion on Management Control ..................................................................... 4 Management Comments ................................................................................. 4 Report Sign-off ............................................................................................... 4

Detailed Observations and Recommendations.......................................................... 5 2.1 2.2 Including Sales and Marketing in the Strategic Plan .......................................... 5 Sales and Marketing Policies............................................................................ 7

2011 11 16 - SMRC - Sales And Marketing - Audit Report.Docx

SOUTH METROPOLITAN REGIONAL COUNCIL


Internal Audit of: Sales and Marketing

1 1.1

EXECUTIVE SUMMARY INTRODUCTION


The Council engages in the sale of recycled waste material produced from the raw waste sourced from member council street collections (household waste and recycling bins) and from other commercial entities wishing to dispose of their recyclable waste. Input waste is converted or sorted into saleable products including:

Recyclables such as plastics glass and paper (MRF) Compost and mulch from green waste inputs (GWF)

These products are then sold back into the market under a number of take-off contracts that are in place. Some of these contracts will expire shortly and will be tendered out. The last two years has presented the Council with some significant challenges that have impacted on its operations. The most significant of these were:

the destruction of the MRF and subsequent delay in the insurance payout, and the withdrawal of Canning Council from the Regional Council.
These two events had a significant impact on production volumes and sales and as a result the Council conducted a full review of sales and marketing activity in January 2011. The current marketing plan has a relatively short, two year time horizon with a focus on recovery actions. Discussion with management indicated that a full review of the marketing plan will take place in 2012 and that it will be aligned with the strategic plan dates at that time.

1.2

OBJECTIVES AND SCOPE


The principal objectives of this review were to assess the level of compliance with the Councils policies and procedures relating to the management of sales and marketing risks. In particular, the following attributes of the Councils sales and marketing activities were reviewed:

Current sales and marketing policies and procedures. Market


development strategies communication and retention. and processes including customer

Market and product risk mitigation plans which will include issues relating to: Counterparty credit risks. Contract delivery and product claims. Insurance cover for product and delivery failure. Failure to procure adequate sales volumes to absorb production output. Policies and processes in place for product delivery, pricing, receipts and
hedging activities.

Market intelligence and reporting processes.

2011 11 16 - SMRC - Sales And Marketing - Audit Report.Docx

SOUTH METROPOLITAN REGIONAL COUNCIL


Internal Audit of: Sales and Marketing

Processes for the purchase/sale of carbon credits. Internal reporting processes and KPI benchmarks.
The scope of the audit encompassed the application of current policies and procedures and an assessment of their adequacy. A sample of transactions was taken covering the period from 1 January 2011 to 30 September 2011 to test the effectiveness and compliance with the stated policies and procedures.

1.3

INHERENT LIMITATION
Due to the inherent limitations of any internal control structure, it is possible that fraud, error or non-compliance with laws and regulations may occur and not be detected. Further, the internal control structure within which the control procedures that have been subject to internal audit operate has not been reviewed in its entirety and, therefore, no opinion or view is expressed as to the effectiveness of the greater internal control structure. An internal audit is not designed to detect all weaknesses in control procedures as it is not performed continuously throughout the period and the tests performed on the control procedures are on a sample basis. Any projection of the evaluation of control procedures to future periods is subject to the risk that the procedures may become inadequate because of changes in conditions or that the degree of compliance with them may deteriorate. We believe that the statements made in this report are accurate, however, the opinions expressed and observations noted in this report are based on the oral, written and electronic sources of information provided during our work.

1.4

SUMMARY OF OBSERVATIONS AND RECOMMENDATIONS


The methodology adopted in this review was to undertake an assessment of the documents that evidenced whether certain marketing and sales risks are being addressed by management. We did not seek to determine if the information and considerations covered by the documents were accurate. Our assessment is based on whether certain key risks have been addressed. The stated objectives of the audit testing reflect this methodology. Overall, we consider that the risks inherent in the sales and marketing function are being well managed. Sufficient documentation is available to support the directions taken and actions plans have been implemented to address the issues noted. Our review of all areas covered by this audit did not reveal any area of significant concern. In relation to each of the scope areas we note the following: Market Development Strategies The current marketing plan for 2010-2012 provides details of the key strategies for developing and sustaining markets for both the waste input from member councils and other clients, as well as addressing issues that may significantly impact on the ability of the Council to operate effectively in the longer term. These include:

Ensuring that contracts for the input waste from member councils and other
commercial operations are sufficient to ensure full capacity usage.

2011 11 16 - SMRC - Sales And Marketing - Audit Report.Docx

SOUTH METROPOLITAN REGIONAL COUNCIL


Internal Audit of: Sales and Marketing

Consideration of product take-off contracts and the development of new


markets for the Councils products. costs.

Minimisation of residual waste to increase usable output and minimise disposal Impacts of legal and legislative issues such as any proposed carbon tax and
offset credits. The marketing plan appears well constructed and covers the key marketing risks. We note however, that whilst sales and marketing activities are aligned to the Strategic Plan (Key Focus Area 3, Business Sustainability), they do not form a key focus area of their own. We consider that, as the marketing activities are integral to both the feed stock as well as output take-off, they should be reflected in the strategic plan as a new Key Focus Area (See section 2.1). Sales and Marketing Policies and Procedures There is no specific sales and marketing policy in place. We believe that there are a number of specific risks, other than pricing, that the Council should consider addressing through the introduction of appropriate policies. (See section 2.2). Market and Product Risk Mitigation There is evidence that product and legal risks have been reviewed and ongoing monitoring programmes have been established to mitigate them. The risk register has identified key risk elements relating to product and legal liability, market contraction risks, legislative risks associated with the impact of carbon pricing, and reputational risk associated with operational failure that affects public image. No adverse issue was noted. Market Intelligence and Reporting The documents reviewed provided sufficient documentary evidence that key market intelligence regarding the performance of markets and the recognition of matters that may influence or impact the Council are being effectively monitored and reported. In particular, the Marketing Overview 2010 2012 and the Mid Term Marketing Review provide adequate evidence of this. No adverse issue was noted. Processes for the Purchase/Sale of Carbon Credits The issue of carbon credits is covered at length in the documentation provided to the auditors. The uncertainty regarding the impact of the current legislation on the operations is acknowledged. Risk issues regarding the impact of carbon pricing is adequately covered in the marketing plan and from discussions with the Director, Business Development there is an awareness, knowledge and continued monitoring of the issues in this area. No adverse issue was noted. Internal Reporting and Benchmarks Reporting appears adequate. There have been two reviews of the marketing plan in the past year to accommodate the turbulent nature of the environment that the SMRC is currently operating in. These have been reported through to Council. Reports are available providing updates and status reports on the action plans contained in the market overview document. No adverse issue was noted.

2011 11 16 - SMRC - Sales And Marketing - Audit Report.Docx

SOUTH METROPOLITAN REGIONAL COUNCIL


Internal Audit of: Sales and Marketing

Testing of Sales Contract Transactions A sample of transactions was tested to determine the level of compliance with any contractual terms and conditions, including contract pricing. No exception was noted.

1.5

OPINION ON MANAGEMENT CONTROL1


This audit sought to confirm that there appears to be sufficient controls and processes in place to provide information and reporting to mitigate the principal sales and marketing risks. Other than the two issues raised in this report, we believe that the control environment is of a very high standard. Accordingly, we assess an overall A rating.

1.6

MANAGEMENT COMMENTS
Consideration of the recommendations made will be undertaken at the next review of the current Strategic scheduled for completion in 2012. A Sales and Marketing Policy will developed and planned for Council consideration in February 2012.

1.7

REPORT SIGN-OFF
2020 Global Pty Ltd

Jon Petelczyc Managing Partner 16 November 2011

Scale of Opinion Ratings: A Control framework effectively managing risks. B Control framework generally operating effectively. C Some significant matters require attention, but control framework otherwise operating effectively. D Inappropriate control framework in place.

2011 11 16 - SMRC - Sales And Marketing - Audit Report.Docx

SOUTH METROPOLITAN REGIONAL COUNCIL


Internal Audit of: Sales and Marketing

2 2.1

DETAILED OBSERVATIONS AND RECOMMENDATIONS2 INCLUDING SALES AND MARKETING IN THE STRATEGIC PLAN
Rating: Concern Standard

Risk Management practices.


Testing

Review of the latest available marketing plan and documents. Reviewed the integration of the marketing plans into the overall strategic plan,
risk management framework, and risk registers. Observations The Council has in place well developed risk management processes and strategic plans. As part of this review we considered the impact that sales and marketing activities have on the Council, and whether the risks they carry are adequately reflected in the risk register and strategic plan. From the documents made available and discussions with staff regarding the impact and the operational uncertainties regarding the Councils product inputs and outputs, we consider that there are a number of very significant risks being managed by Sales and Marketing that are strategic to the future success and viability of the Council. These include:

Unattractive member prices for MSW collections which can lead, as was seen in
the case of the Canning Council, to the withdrawal of members and the resulting revenue source. commodities market for recycled goods is high and can result in poor sale prices. fill sites.

Unpredictable markets for commodities and products. The volatility of the Significant competition from other lower cost structured operations such as land Sales and marketing activities may be impacted in the long term if government
policies aimed at removing the price structure disparity do not eventuate. on long term investment.

Waste recovery is, at best, a socially unattractive industry and this may impact
In view of these issues, we consider that the sales and marketing activities potential impact on the long term ability of the Council to survive constitutes a significant strategic planning risk.

Scale of Observation Ratings: Critical Important Concern Minor Compliant Needs to be resolved immediately. A short-term fix may be required prior to being resolved properly. Needs to be resolved as soon as resources can be made available, but no later than six months. Resolution should be planned for action within nine to 12 months. Relatively insignificant issue brought to managements attention for action as considered appropriate. No adverse observations were noted.

2011 11 16 - SMRC - Sales And Marketing - Audit Report.Docx

SOUTH METROPOLITAN REGIONAL COUNCIL


Internal Audit of: Sales and Marketing

The Councils Strategic Plan 2010 2015 includes a section relating to Business Sustainability and provides five strategies for attaining this. While some of the elements of the marketing plans are mentioned, we consider that the Strategic Plan should be expanded to either:

Include a greater emphasis in the current Business Sustainability section


(Focus area 3) on marketing risks and mitigation or; marketing issues.

Introduce a new strategic plan focus area that deals specifically with sales and
Implications

Impact of the sales and marketing activity in an economically volatile


environment may not be recognised adequately as a strategic risk that needs to be planned and managed effectively.

Recommendations We recommend that the following action be considered:

Review the current Strategic Plan to incorporate sales and marketing activities
as further Key Focus areas. Management Comments Consideration of the recommendations made will be undertaken at the next review of the current Strategic scheduled for completion in 2012. Responsibility Director Corporate Services Estimated Completion Date July 2012

2011 11 16 - SMRC - Sales And Marketing - Audit Report.Docx

SOUTH METROPOLITAN REGIONAL COUNCIL


Internal Audit of: Sales and Marketing

2.2

SALES AND MARKETING POLICIES


Rating: Concern Standard

Best Practice Risk mitigation


Testing

Review of marketing related policies.


Observations It was noted that the Council has a pricing policy in place which relates primarily to the pricing and charging of statutory and other user pays fees. Whilst this incorporates some sales pricing elements, there is a significant number of marketing issues that we believe should be covered by a separate sales and marketing policy. The Council does not currently have a sales and marketing policy and, in view of the comments made in section 2.1, it is recommended that one be written to, as a minimum, cover the following issues:

Product and other legal liability risks. Aspects of insurance cover for marketing risks including contract performance,
counterparty risks, and product liabilities.

Market risks and exposure limits where applicable. Sales contracts. Counterparty and, if applicable, foreign exchanges risks. Planning and reporting requirements. Advertising.
Policies are one of the cornerstones of good governance. As sales and marketing is, in the Councils case, a strategically important area, we consider that it would be prudent to have policies in place to guide and direct staff actions in this area. Implications

Lack of appropriate Governance over the actions of staff. High risk area requiring policy directives.
Recommendations We recommend that the Council:

Develop an appropriate Sales and Marketing policy that provides appropriate


guidance and limits to the actions of staff. Management Comments A Sales and Marketing Policy will developed and planned for Council consideration in February 2012.

2011 11 16 - SMRC - Sales And Marketing - Audit Report.Docx

SOUTH METROPOLITAN REGIONAL COUNCIL


Internal Audit of: Sales and Marketing

Responsibility Director Business Development Estimated Completion Date February 2012

2011 11 16 - SMRC - Sales And Marketing - Audit Report.Docx