Beyond compliance-only services: how forward-thinking practitioners are responding to the challenges of the recession

The Validis Insight Interviews explore the challenges and opportunities that accountants face, how forward-thinking practices are responding and how accounts review technology supports their goals.

Interview with Peter Bentley, Senior Partner at Kershen Fairfax

About Kershen Fairfax

Kershen Fairfax is a 60 year old accounting practice with 4 partners. They have over 600 clients, varying from small companies to those with turnovers in excess of £10m. The tasks Kershen Fairfax perform for their clients range from tax returns and 'shoe box' bookkeeping services to management and statutory accounts production for Limited companies and LLP partnerships. The firm also perform audits for private companies and other regulated entities.

Peter Bentley is a senior partner with the firm. When asked to define the practice's culture, he summed it up simply as "dealing with each of our clients on a personal basis". This is represented in the meticulous way they approach any work they conduct for their clients and the thoroughness and diligence they employ in their audit work. They use technology where applicable to help them deliver this level of service and quality to their clients and other interested parties. They see the role of technology as increasing efficiencies, without sacrificing quality or increasing business risk for either their clients or their practice.

The changing audit industry

1. An industry under scrutiny
   The accounting scandals of the early 2000s, and their revelations of widespread mistakes and misstatements (Enron, Arthur Andersen, etc), emphasised the duty of care the audit profession has to all stakeholders in the business world. Since then, auditors have been under increasing scrutiny, and practices have had to exhibit ever more thorough methods and attention to detail in their audit planning and execution.
2. The need for increased scrutiny in the industry
   The current economic climate is such that there is even greater pressure on auditors to maintain and improve auditing standards through the careful review and analysis of a client's business fundamentals - their procedures, transactions, financing, and ability to continue as a going concern.
3. A more competitive industry
   In addition to these pressures, 69,000 companies were removed from the audit pool in January 2004, when the threshold for audit was raised from companies with a £1m turnover to those with £5.6m, and has since risen to £6.5m. This increased competition for audit work and more cost effective procedures, whilst at the same time maintaining standards at a high level.

The audit industry dilemma

These three factors have resulted in diametrically opposed demands on the industry:

1. To deliver more thorough financial scrutiny in an increasingly unforgiving and potentially litigious business climate
2. To reduce or, at the very least, maintain parity in fees - which in normal circumstances would equate to economies of time and/or quality

These pressures are particularly acute for small to midsized accounting practices, who cannot command the bigger audit fees which, rightly or wrongly, the larger accounting firms charge.

So can technology help? - Current audit automation tools

There are many good audit automation tools in the marketplace, including CCH ProSystem Audit Automation, currently used by Kershen Fairfax, which: makes audit and materiality threshold calculations through applying industry standard rules to summary accounting data; allows the level and types of testing to be derived by the auditor based on those thresholds; allows tracking of progress against the auditor's plan; and produces the relevant documentation for the audit.

However, using only industry standard rules and summarised accounting information does not necessarily allow the audit to be fine tuned to the particular business being analysed. They do not provide the user with the granularity of data and the advanced analytical tools and techniques needed to investigate and understand particular figures in the detail required to spot business change, unusual behaviours and exceptions. This increased business insight is crucial to define the way the audit should be enhanced and which questions should be asked.

As a result, there can be too much reliance on last year's audit file and repetition of what was done in previous years to ensure efficiency so that fee targets are met. There may not be enough focus on: how the business has changed from year to year; what caused any change (either positive or negative) or allowed the business to maintain parity, even in tough trading conditions; and what behaviour this has resulted in when producing the accounts. In short, audit planning and the test and investigation structure it proposes needs to change to respond to the increasing pressure for a more analytical approach to audit.

The Validis Solution

The Validis Accounts Review service provides accountants with a level and quality of accounts review that is simply unachievable using traditional manual review methods.

At the click of a button, the highly secure online service:

• Checks every transaction against standard accounting tests to identify issues
• Identifies transactions that are abnormally high in value, against materiality levels that are user defined
• Identifies any transactions that are inconsistent with others of their type
• Identifies key trends and highlights activity that falls outside of those trends
• Calculates key performance ratios and variances across any time periods the user cares to define
• Presents the results in a clear, concise format that can be readily downloaded for integration with other practice generated reports during the audit, and stored on the audit file.

The service perfectly complements tools like CCH Prosystem Accounting Automation and, as such, is helping accountants like Kershen Fairfax to deal with the industry and technology issues discussed.

The depth and speed of the analysis it provides allows auditors to deliver the level of scrutiny required in order to plan and conduct an audit in an efficient, analytical way. It can help ensure practices increase audit efficiency, while reducing risk, and creating the opportunity to gain competitive edge.

Enhancing insight, judgement and focus

Validis Variance Analysis allows users to spot changes in business performance and conditions instantly; being able to drill down and make transactional comparisons provides insight into the causes of that change. Investigation is guided by the automated identification of transactions that potentially look out of place. Users can then zoom in and out of the data to control their area of focus by using the configurable viewing periods and materiality settings throughout the Validis analysis areas.

Enhancing audit testing

The accounting scandals uncovered a widespread failure with audit: that of not involving the audit team partner and manager during the planning phase to help ensure audit plans emphasise scrutiny of non-routine transactions - particularly those recorded near year end, when management sometimes records inappropriate transactions.

Validis tests have been designed with these requirements in mind. The trend analysis visually tracks activity in each nominal account between periods. Only significant change is presented back to users, reducing the time required to review results. However, potential 'window dressing' or major mispostings are revealed automatically, without users having to conduct their own tests on the data - cutting investigation time from hours to minutes.

In a traditional audit automation tool, a user will put materiality into the system, which then changes the proposed questions and tests required during the audit. For example, a certain level of materiality may lead the program to propose a test to examine ten sales invoices over £10,000. There are two possibilities for improvement here: firstly the audit tool does not perform the test itself; secondly, the test is automatically proposed as a sample, due to fee structures and the time constraints of manual methods, meaning the auditor looks at only a small set of possible suspect results, none of which may be truly suspect.

The thoroughness of the tests also increases the probability of identifying large, related-party transactions - another major deficiency identified in audit procedures. The auditor can confirm if unusually timed, large transactions, identified through a combination of trend and exceptional value analysis, are by a related party. If so, the counter party can be questioned to obtain confirmation of the transactions' authenticity.

Other enhancements

Due to the fact that auditors are not involved in the day-to-day running of a client's accounts, Validis provides a number of tests that help the auditor assess the quality of financial skills, procedures and controls inside an organisation. Unusual combinations analysis and accounting rule tests allow the user to assess the data quality of accounts being kept. They identify any exceptions to standard accounting best practice and the misclassification of transactions, allowing the auditor to make recommendations for training, and for changes to quality processes and controls.

Validis also offers a way of providing insight to clients at the final review meeting, in terms of business reporting.

The depth of the Validis Variance Analysis, business ratios and aged debtor analysis, allows the auditor to make value added recommendations in their audit report. These could include critical changes in business processes. For example, if debtor days are increasing, a review of the client's collection processes, procedures and systems may be needed.

Summary of benefits Validis brings to auditors

• Plan and cost audit engagements more effectively by running an instant assessment of the client's data
• Identify more issues and address them with the client at the planning stage
• Avoid wasted work by reducing the risk of unseen issues arising late in the audit process
• Take a more analytical approach to audit and audit planning, and increase the scrutiny of clients, particularly in a harsher financial climate
• Increase the efficiency of this type of approach, allowing it to be commercially viable in a more competitive market
• Assist partners and managers in planning appropriately for the risks specific to the business in question
• Provide a set of tools to help more junior staff visualise the business, to focus their attention by identifying changes and exceptions, and enable them to locate and question the transactions that have caused them
• Conduct comprehensive tests consistently across all audit clients, reducing investigation overhead but improving effectiveness, reducing risk, improving efficiency, and saving cost
• Monitor audit work being undertaken by more junior team members
• Ensure a consistent auditable audit process across all of your engagements
• Use Validis to identify additional added value services

Other uses of Validis in the Accounting profession

With the raising of the audit threshold it has become very hard for the regulators to be able to understand what professional scrutiny a set of accounts has been subject to before it is delivered to Companies House to fulfill a director's statutory obligations under the Companies Act. This has led to a increasing problem with the quality standards of statutory accounts filed.

Providing a solution to this issue is a major focus for the Professional Oversight Board over the near term, under their new chair Dame Barbara Mills. It is likely to exert pressure for a more analytical approach to accounts review even in sub audit threshold companies.

 

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