business-mindedness helps you identify risks.
by alan anderson, cpa
transforming audit for the future
i’ve previously described a task i have teams perform at the end of an audit. after everyone shares their insights about what they learned about that client and their operations, i ask everyone to complete this phrase:
“if i were running this business, i would ______________.”
more: are you using the right business model? | give advice while remaining independent | the new formula for an accounting business | don’t risk losing good employees for bad clients | four questions to make your firm more successful as a business | say adios to audit fee pressure | deliver more audit value by getting out of the conference room | six essential elements in audit planning | before the audit: more than just planning | five crucial attributes for successful audit leadership | put the ethics code to work for your clients and your firm | is audit in crisis because of definitions?
exclusively for pro members. log in here or 2022世界杯足球排名 today.
here are a few of the ideas i’ve heard audit teams come up with in that exercise:
- discontinue an unprofitable product line. as far as we could tell, sales of this product didn’t cover even the fixed costs of making it.
- look into their cash management. this client had an abundance of cash, but they weren’t doing anything with it. they could use it to pay down debt or temporarily invest it.
- look for unintended consequences of bonus plans. this company incentivized managers to keep their people busy, even if that meant employees were kept busy punching out unneeded parts that ended up as scrap.
even if you don’t relay all the ideas to your clients, just discussing with your team will help them expand their thinking beyond the checklists to the businesses they’re working on. it gets them to think like a business owner. it encourages them to build up an internal repository of best practices and worst practices so that when they work with a new client, they compare that client’s practices to their library of best practices.
recently, i was coaching a gentleman to be the efficiency expert for an audit firm. we picked three engagements to go through to find areas to be more efficient. one client had a lot of cash accounts, so he thought a good tactic would be to pick the two biggest ones and focus on those. those two were an investment account for a deferred comp plan and a money market savings. over on the liability side, he wanted to look at the big numbers again. but that’s not where the risk necessarily is.
as accountants, we tend to focus on the big numbers, but the accounts with the biggest balances aren’t always the ones with the most significant volume of transactions, which is where the risk tends to be. when you fine-tune your business-mindedness by learning more about a client and an industry, the more you know which areas to focus on in an audit. it’s not always the biggest balances that matter as much as what those numbers should be with other accounts and the client’s overall situation. does that situation provide the client any motivation to overstate or understate?
the financial crisis of 2008-2009 exposed organizations’ relatively weak enterprise risk management processes. conditions were ripe to incentivize fraud. business-mindedness means being aware of the overall economic and business conditions and how that might impact your client. in difficult times, an auditor needs to apply additional skepticism and cautious scrutiny to subtle attempts to mislead.
for example, organizations can manipulate earnings by adjusting bad debt reserves or changing the useful lives of assets. they can also accelerate revenue recognition by shipping products at year-end for orders not needed until the following year. auditors need to be on alert for these kinds of subtle actions. upon discovery, it’s critical to focus on management’s intent. was management pressured to “make their numbers,” and they saw the opportunity to make this adjustment?
determining intent can be difficult, especially with a first-time audit or an inexperienced team. be cautious and suspicious if you are ever pressured to let management get away with it “just this once.” that can start you on a slippery slope, which is undoubtedly how many of the big audit failures of recent history began.