A SOFTWARE TOOL FOR INTERNAL OPERATIONS RISK ANALYSIS

By Katherine T. Smith and
L. Murphy Smith

The Internal Operations Risk Analysis, developed by Business Foundations, is a software tool designed to help a CPA acquire some in-depth knowledge about a business, whether it be a client, employer, or other relationship. The software helps analyze functional business areas such as personnel policies, budgeting, time management, and the internal control structure.

The software is an expert system built around 180 interview questions. After completing the questions, the software generates a management report that identifies strengths and weaknesses in the company's operating structure. The program assigns a "risk rating" (low, medium, or high) to each of 27 categories and identifies the individual questionnaire responses that contribute to medium and high ratings. The analysis identifies corrective actions needed and gives reasons why problems should be addressed. Since the program was designed to cover areas common to most businesses, the commentary is left somewhat generic. Customizing features allows you to add more specific observations and recommendations. Business Foundations' plans for software upgrades include industry-specific components.

If a CPA wants to be a "coach" to businesses rather than just a scorekeeper, he or she must be thoroughly knowledgeable about their specific operating environment. A comprehensive, well-integrated and controlled internal operating system is essential to the continued success of any business. Customer and employee satisfaction, protection of company property and inventory, efficient and effective utilization of resources (time, money, materials, personnel), and meaningful planning are dependent upon solid operating systems and availability of useful, accurate, and timely information. This software was written to help provide helpful guidance of this nature.

The analysis covers the operating components shown in Exhibit 1. Reports can be generated for selected components if desired.

Performing the internal operations risk analysis can benefit both the CPA in public practice and in industry. Specific opportunities to provide this analysis are shown in Exhibit 2.

Software Features and Use

Questionnaire and Interview. The recommended time to complete the interview is two to four hours. To finish in this time and avoid fatigue, on-the-spot problem solving must be kept to a minimum. Note-taking space is provided for each question to record specific details about a response and situation.

By systematically covering many areas of operations, a "big picture" of the company can be viewed which should facilitate a more accurate identification of causes and correct prioritization of action items than troubleshooting alone, as well as reduce the likelihood of future problems due to oversights. The inclusion of owners and key managers in the evaluation process can strengthen lines of communication, between each other and with the CPA, and can yield a better understanding of problems and corrective actions.

Management report package. The management report package is comprised of the following:

* The cover letter is designed to introduce the concepts underlying the internal operations risk analysis. This letter discusses the general process and results, and is customized with names and addresses.

* The table of contents is numbered automatically when the report package is run and lists the major categories included in the detailed report.

* The explanation page gives a detailed overview of the report package. It explains how to use each report and how to get the most out of the analysis.

* The summary of results is a two-page working document used to prioritize deficiencies and tasks. By viewing the analysis in this concise format, problems most urgently in need of correction can be quickly identified. The report includes the weighted average risk for each individual subcategory. A "high risk" designation usually indicates that immediate attention should be given to elements in that group. "Moderate risk" indicates that there are individual problem areas within the subcategory that should be reviewed. Space is provided for priority assignments and targeted completion dates.

* The detailed report gives educational information for each of the 27 categories. Those assigned a high risk rating contain an explanation of potential problems as well as recommendations for improvement. In those rated low or moderate risks, a "pat on the back" is given for doing well and reasons for continuing good business practices are provided. These reasons and explanations are brief and understandable and are written in a motivational style. Additional commentary and very specific recommendations can be added to each category to further customize this report. By providing educational material, more insightful interaction between the client or management and the CPA is possible.

* The completed questionnaire shows each question with response. It allows the CPA and the operations management to review the responses to gain a better understanding of the analysis results. This report can assist in prioritizing corrective actions by focusing attention on the high risk responses with each category.

More About the Software

Exhibit 3 provides a summary of information about the software and related products offered by Business Foundations. As shown, the vendor provides a money-back guarantee.

The purpose of the Internal Operations Risk Analysis software is to help the CPA gain knowledge of and offer valuable assistance to clients and businesses. As a result, growing companies may develop internal structures that will facilitate efficient and effective expansion. For example, bad business habits and ineffective systems can be corrected before they become costly and troublesome burdens. Proper selection and implementation of systems and controls can reduce the risk of errors, asset loss, fraud, and embezzlement. Shortages of excess and obsolete inventory can be minimized. Risks associated with cost cutting can be evaluated before such decisions are made. *

Katherine T. Smith, DBA, is a management consultant and L. Murphy Smith, DBA, CPA, an associate professor
of accounting at Texas A&M University.

Editors:
Paul D. Warner, PhD, CPA
Hofstra University

L. Murphy Smith, DBA, CPA
Texas A&M University