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By John Quay

With the growth in financial auditing leveling off, the search is on for ways to improve and expand the traditional audit. The two most noticeable directions of this search are the effort to improve the usefulness of audits to users and attempts to add value for clients based on the increased availability and computerization of comparative information, i.e., benchmarking.

Efforts to make audited information (or more politically correct assurance services) more extensive and more timely for users is being explored by an AICPA special committee. According to Robert Elliott, chair of the committee, options being reviewed focus on increasing the relevance of information to decision makers on a timely (perhaps online) basis.

The work of the Elliott committee is perhaps five to 10 years in the future. In the meantime, the major thrust of improved client service is benchmarking. Made readily available by the explosion of information being poured into computers, firms are using this data to compare client performance with competitor companies. PeerScape by Deloitte & Touche is typical. To quote from one of their ads, "using crystal-clear charts and graphs, PeerScape gives you a dramatic overview of your company's performance compared to its industry."

Whether taken from public information or compiled from client data, this kind of information is excellent for preparing a diagnostic overlay--a picture of where your client (or employers) is ahead of, or behind, the wave. By focusing attention on areas needing improvement, auditors (and accountants) can often do a real service. In addition, it is usually possible to hypothesize a number of likely causes of problems. For example, take the case of a company whose manufacturing costs are significantly above the competition. This might be due to such factors as‹

* old or poorly maintained machinery,

* unqualified or poorly trained workforce,

* poor processes or methods,

* purchasing of high cost or poor quality materials,

* low morale or poor security, etc.

This diagnostic role comes very naturally to auditors and accountants who have been analyzing business performance by the numbers for a long time. What is new is the vastly expanded range of parameters by which they can determine the general health of companies. Like general practitioners in the medical profession, they are besieged by new tests, instruments, and criteria for determining the wellness or sickness of their patients. In response to this broadening range of analytical tools and performance data, several CPA firms are hiring more MBAs and even liberal arts majors, and most are developing training programs to assist their staffs to perform in a business advisory role.

Benchmarking, i.e., pointing out where the problems are, and suggesting some possible causes is helpful. However, identifying the actual causes and providing ideas for solution are even more helpful services. To add this
additional benefit requires on-site
investigation, mostly via interviews. Two approaches are recommended:

* Change the way the usual audit is performed to include a broader range of information, and

* Sell the client on the merits of a diagnostic survey as part of a periodic check-up on the business or focusing specifically on problem areas identified by benchmarking.

A New Audit Approach. Auditor interviews typically rely on asking a series of prepared questions to determine the presence and/or adequacy of controls, checks and balances, policy compliance, etc. A good example of this approach has been provided by Alan Jacobs from the Missouri firm of Mayer Hoffman McCann. In a handout presented at the 1994 AICPA National Small Firm conferences he listed 60 "Yes/No" type questions to cover internal cash control. Obviously the intent of these questions is to assure comprehensive coverage of the system or process. But what if a question or two are missing or forgotten? More important, what about the interviewee's perceptions, judgments and ideas for improvement?

Consider instead an approach which begins with, "Walk me through the cash management system (or other area being investigated), including where you feel it is working well, where it might be improved a bit, and any ideas you may have on how this might be done." "Tell me more about . . ." is used to probe areas of special interest, and follow-up questions cover specific omissions. Underlying this approach are assumptions that employees on the go have the best knowledge of the work being performed and the work environment; many of them have good ideas for improvement; and most people enjoy talking about their jobs given interest, support, and encouragement by a friendly interviewer. Using this approach, the auditor or accountant will collect ample information regarding both the company's assets and problem areas. Auditors will also collect a great many good ideas for correcting or improving the problems identified. These ideas, together with the auditors' own best judgments, should provide an appropriate range of options for top management's consideration.

A Diagnostic Survey. Companies, like people, need periodic checkups from time to time to maintain optimum equilibrium. Auditors‹or auditor and consultant teams‹are ideal for performing such diagnostic surveys. Furthermore, a number of situations suggest themselves for proposing this kind of engagement:

* The client gets new management and wants to learn all about the business as rapidly as possible from an unbiased source.

* The CEO and/or audit committee want a broader, more value added input from the audit.

* The client wants a thorough review of a possible acquisition.

* A new partner or audit team is assigned to the client and needs a quick, in-depth understanding of the business.

* The audit firm uses the diagnostic survey as a selling point or condition of acceptance regarding new clients. Brainstorming will yield additional reasons for performing diagnostic surveys.

The management letter or feedback report would now cover not just issues of proper controls and compliance, but also a review of the major assets, problem areas, and a range of ideas for improvement. The last would include things management can do for itself, as well as areas needing outside expertise.

Under either approach above--as part of the audit or as a special survey--the audit firm have to invest something in the first effort. Done properly, this should be the last investment. Thereafter such work should command premium rates. In this connection, as a byproduct of both approaches above, there is the likelihood of follow-on engagements. This comes about because, while many issues emerge from the interviews, managements cannot cope with more than a few major problems a time. Auditors, therefore, should focus on the most pressing concerns first and bring up additional areas needing improvement later. *

John Quay worked in two major CPA firms before becoming an independent consultant. He lives in Cincinnati and is the author of Diagnostic Interviewing for Consultants and Auditors.


Michael Goldstein, CPA

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