How well do you really know the business processes that are driving forces
behind your financial statements? Your organization has systems for shipping orders,
collecting customer payments, buying materials from distributors — and all these systems work to your knowledge. But do you
have controls in place to test their efficacy?
With new changes issued by the Auditing
Standards Board, effective as of Dec. 31,
2007, public accounting firms must approach
audits of nonpublic entities with a sharper
eye on controls. Auditors can no longer automatically default to substantive auditing
methods — where they only document a
general understanding of a company’s controls. The audit process now requires a “digging in” to find out how a business really
works. They must analyze and test the real
moving parts of an organization.
“The more visibility we have into an organization, the greater value we can provide in
an advisory role,” says Anthony Caleca, CPA,
a member-in-charge of the Audit Group at
Brown Smith Wallace LLC. “The more moving parts an organization has, the harder it is
to determine whether or not a process is taking place as it should.”
Many owners, too busy working in the business and managing daily operations, do not
set aside time to work on the business,
Caleca adds. Or, they intend to take time out
to establish formal processes and controls,
but other activities take priority.
Smart Business spoke with Caleca about
ways to analyze the processes that make
your business tick.
Why the focus on auditing now, and how will
financial statements be audited differently?
The users of financial statements have
demanded a significant increase in efforts to
improve financial reporting. Publicly held
companies have had to implement Sarbanes-Oxley; now private companies and organization have to adhere to these new audit risk
standards. These new public and private
company standards are a reaction to failed
audits and financial reporting that have
occurred in this marketplace. Accountants
must have a real understanding of every
process that drives their clients’ financial
statements. Essentially, the new private company rules will prompt a fresh look at how
transactions are being processed and where
time and money may be wasted.
Are business owners surprised when they
learn the truth about whether their processes
are effective?
Yes, in many cases, they thought a department was performing a certain task that wasn’t being executed properly. Or, they thought
a system was working when it was not. For
instance, say you own a $50 million business
and you expect all customers to go through a
credit application process. You assume that
your credit department is scrutinizing customers’ creditworthiness. Under the new
standards, an auditor actually walks through
the credit application and approval process
and discovers that many customers’
accounts receivable balances exceed their
pre-established credit limits. The system, if
there is one, clearly does not work. The company risks shipping products to customers
who can’t afford to pay for them. Our goal as
auditors is to gain a detailed understanding of
the processes and controls in the significant
areas of a business. In doing so, we make
value-added discoveries. We may notice a 10-step process that can be condensed into five steps without undermining the controls and
performance of the company. This can be a
real eye-opener for business owners.
What resources must businesses invest in to
adopt better controls?
First, developing high-level controls takes
time and buy-in from key individuals who
manage significant departments in your
organization. If your company doesn’t have a
narrative or a relatively detailed description
for every process from sales to posting customer payments and everything in between,
that’s step one. Step back and consult with
managers to find out how they handle every
transaction. Put it in writing. Examine each
system and decide whether there are holes
that present opportunities for financial
reporting errors. Every process must be documented before meeting with an auditor,
who will begin to dissect these systems and
analyze them for potential ‘leaks.’ Under the
new standards, your auditor will likely be on
site with you at least three times a year.
Ultimately, the time and work required to test
controls will drive up auditing costs by as
much as 25 percent. We prepared our clients
for this new effort by rolling out a readiness
process and detailed information package to
explain how greater scrutiny can work to
their advantage. It can — and it has.
What benefits result when business owners
fine-tune their internal controls?
First, you improve interdepartmental communication within your organization as you
assemble a team of leading managers and
employees who help you define processes
and understand the working parts of your
company. Second, your auditor serves as an
active, valuable adviser who truly understands your business, beyond your general
goals and objectives. Taking time to evaluate
every system — the nuts and bolts of a business — sheds light on areas that may need
improvement. And by taking the time to step
back from your business, you’ll have a clear
idea of where you stand today and where
your business is headed.
ANTHONY CALECA, CPA, is a member-in-charge of the Audit Group at Brown Smith Wallace LLC. Reach him at (314) 983-1267 or
[email protected].