How use of analytics helps auditors to better understand your business, increasing the quality of their assurance services
I recently read an article in the Journal of Accountancy, titled: “Data Analytics helps auditors gain deep insight”, authored by Maria L. Murphy, CPA and Ken Tysiac. This was published a few years ago and for some reason I just ran into it and realized that it is even more relevant now than it was in 2015 when it first came out.
The authors are mainly referring to independent, external auditors, performing annual audits (and perhaps quarterly reviews) of their clients’ financial statements. But they also mention the internal audit function, usually present in larger organizations, both private and public, and the extra tools available to them to continually monitor the company’s performance and any exceptions resulting from internal control ineffectiveness, fraud and other anomalies.
Using analytics tools, now available to most companies even in the SMB (Small and Medium size Business) space, both internal and external audits can gain better insight into the business and use entire data sets (population vs. just samples) to determine deviations from prior years or periods, or deviations from expected norms or industry data.
Both internal and external audit functions can significantly increase their assurance service quality, and in the case of external audits, these improved assurance levels can be quite higher than the required minimum standards.
Those working with external CPA firms performing assurance services know the difference between audits, reviews and compilations and the amount of work (and cost) involved with each type of engagement. While analytics can be used in all three engagement types, it is much more common to employ it in audit engagements.
Traditional audits, performed to established standards, are designed to provide an opinion on the company’s financial statements, generally stating that the audited financial statements (after all audit adjustments have been made) fairly present, in all material respects, the financial position of the company as of the audit cutoff date (last day of the fiscal year under audit) and are in accordance with accounting principles generally accepted in the United States of America (US GAAP).
Since all external auditors are required to use the same audit standards and companies are required to have financial statements that are US GAAP compliant, it follows that audited financial statements produced are of a similar quality and fairly represents the financial position of the companies under audit.
This may be true in most cases, with exceptions only due to the limitations of external audits, where standards only dictate testing of sample data unless substantive testing is performed in certain, high risk areas. Even then, auditors may miss material errors or accounting irregularities due to management fraud.
The use of analytics, however, encourages the prospect of examining much larger data sets and through use of that data, gain better insight into accounting irregularities. Furthermore, internal audit work can be conducted on a continual basis, rather than, say, annually, or quarterly.
In SMBs, most of whom do not have a formal internal audit function, but many of whom undergo an annual external audit and even quarterly reviews, use of analytics can help the auditors in identifying broad issues, many of which result from an inadequately implemented internal control framework.
In recent years, several Analytics software solutions, targeted at SMBs, have emerged. Using such systems, all actual historic GL data is available to the software and can be analyzed in summary or even in detail. In both cases, GL data, either account balances or account activity and even transaction detail, can be analyzed for all fiscal years’ data that have accumulated in the system.
If the FP&A (financial Planning and Analysis) software uses built-in business logic and accounting rules, then actual accounting data can be reliably compared to the budgeted data, all done in the analytics module of the FP&A software. Customized presentation formats can be saved, and individual reports produced with no need to rely on IT or external consulting services as all reports are self-served.
Financial managers can thoroughly analyze the data for exceptions and anomalies, as well as make the data available to their external auditors, who in turn will improve the quality of their assurance services, perhaps well above the required minimum standards.
Analytics, when performed by CPA firms, will allow their client companies to benefit from the insight gained by the independent auditors. The analysis results will increase the effectiveness of internal controls and improve the quality of all internally prepared financial statements.
Internally implemented Analytics, especially in SMBs where accounting and finance staffs are limited, will offer a higher level of automation, at last providing management with solid clues on the financial health of their organizations, past, present and future. Analytics and increased automation in finance, in turn, will empower finance personnel to perform tasks never before possible without the currently available technology.
If your auditors show such interest in analytics and find it to be useful in their work, shouldn’t you be just as interested in regularly performing analytics in your own business?
Alan Hart, MBA, is Principal Consultant at Pacific Shine Group in Portland, Oregon, with responsibility for client business development and hands-on client project implementations. Prior to starting Pacific Shine Group, he worked in various executive accounting and finance positions with technology and growth companies. Notable is his 18 years in the hi-tech manufacturing industry where he served as Controller, Vice President of Finance and CFO of several privately as well as publicly held companies in the Hi-Tech industry, such as Hybrid Arts, Inc., Hamilton Bay Associates and Syncronys Software. In his role in management consulting, Alan has worked in diverse industries and with a variety of clients, including fortune 1000 companies such as Boeing, Delta Airlines, Intel, Wyndham Worldwide and others, as well as many mid-market organizations such as Guitar Center, Ducommun AeroStructures, Cypress Semiconductor, TriQuint Semiconductor and others.
Combining his skills and experience in engineering with deep understanding of technical accounting, he is able to assist small and medium-size manufacturing companies establish GAAP compliant accounting and reporting systems.