Tag: auditor

2013 Audit Season: Joke #3


Cartoon-Confusion-Question-Mark-300x300A bank's field examiner (read my previous
joke if you don't know who that is) comes to review books and records of a company in the NYC's Financial District.

The company leases space in one of those pre-furnished/pre-wired office suites setups with reception services, heavy-duty business equipment, and highly presentable conference rooms shared by various renters.

(Educational  Side Note:
It's a very profitable business. I believe Regus, headquartered in Luxembourg,
is the largest player in the world. Started only in 1989, today it has presence
in 99 countries, operating over 1400 centers. During my career I have dealt with Regus in Amsterdam, London, Moscow, Frankfurt, and New York.)

Those who have never been in such places don't realize that owners try very hard to maximize the rentable footage and fit into the space as many offices as they can without violating occupancy regulations. There could be, like, 120 companies, some of them consisting of a single employee, on one floor. And, therefore, during business hours it never feels empty or quiet. People are coming, going, walking by. The noise level is much higher than in a conventional business space: at any given moment one can hear at least three phone conversations and virtually participate in two neighboring meetings – one with a real estate attorney and another with an advertisement outfit specializing in cosmetics. It's pretty much your garden-variety beehive that sometimes gives an impression of being even more populous than it actually is.

One of the specific aspects of the office suites is the absence of companies' signs and name plaques – just the numbers on the doors. Yet, if you give the name of the company you are visiting to the doormen, they will direct you to the right floor. There, receptionists will not act surprise when you ask for a particular person and will call him or her up right away. (I mean, there is a reason why these businesses are doing
well.)

This is how the field examiner found her way to the company's CFO, with whom she was in contact after the assignment was scheduled.  The auditor was set up in a separate room next to the CFO's office.  Most of the electronic communications and data exchanges transpired between the two of them.  The supporting documentation was provided by the CFO's staff.  But in the hallways, reception areas,  at the coffee station in the kitchen, through the open doors of multiple offices – everywhere the visiting woman saw, to put it mildly, quite a few people.

Please keep in mind, this is a little story about a person of numbers. Moreover, one of the key requirements of qualified auditors is their ability to gage the validity of the data in front of them. The examiners cannot possibly look at every recorded transaction – they make representative selections for documentary proofs; they construct trends; they look at schedules and statements; and they must apply analytical scrutiny and critical thinking to every number to make sure that it makes sense in the context of the examination's scope.

For example, it is expected of an auditor, who already studied a company's Profit & Loss statement, to understand the physical reality of annual rent expense of $85,000 (especially in NYC's Financial District) and annual payroll of $1 million. Call me crazy,
but I don't think one needs to have a business degree and a CPA to interpret these numbers. I mean, any logical person can effortlessly come to the correct conclusion, right?  One can only hope.

The field work was going very smoothly; the company's finance and accounting staff was well prepared and accommodating; the books were clean and the paper trail was flawlessly coherent. Yet, at the very end, when the auditor was reviewing prior exams'
statistical questionnaires to see if anything required an update, all of a sudden she hit a stumbling block…

She walks over to the CFO with the papers in her hand, looking genuinely puzzled. She points out to a section in the questionnaire, "It says here that the total number of
employees is 10." Now, it's CFO's turn to be baffled as she doesn't understand
why this is so surprising, "Yes, that's correct. Ten total."

The field examiner looks into the CFO's face, still confused, "But I thought this whole floor was you…"

Audit Season Woes


As a corporate controller, CFO, and consultant, I've been on auditees' side of the table for the past 20 years. Yet, I still remember the gratifying excitement of coming to a company as an auditor and testing the depth of my expert knowledge in an unfamiliar territory, quickly absorbing the business's specifics and immediately identifying the scope of testing. Well, Ok, I've been called a "show-off" and "know-it-all" many times, so forget me. Over the years, there were other public accounting professionals (not many, but some), who impressed me with their knowledge and sharpness, but it doesn't happen anymore.

I've been complaining about the decline of the quality of work across all jobs, from customer service representatives on the phone to the cardiologists in fancy hospitals, for years. But somehow I still get very frustrated when I encounter the same trend in my own profession. I cannot even explain why. After all, I am very conscious of the managerial accountants' limitations. The main reason for writing "CFO Techniques" was the desire to fill their knowledge gaps. Just a few weeks ago I wrote about The Unimaginable Abyss of Accounting Ignorance in the small-business environment. So, I should not be surprised when I am faced with the same situation while dealing with financial auditors. Nevertheless, it still gets me.

It's audit season, so in the past couple of weeks I've been helping my client (a young company) to go through their very first independent year-end examination of books and records. It's conducted by a small CPA firm hired before my consulting engagement commenced.

Under my guidance, the client's accountants did what I always advise to do in preparation for an audit (see Chapter 30, What Guarantees Fast and Painless Audit, in "CFO Techniques"), i.e. they loaded the appointed auditor in advance with statements and schedules of data required to make all testing decisions. He definitely had time to prepare well.

The client is an importer of raw materials. So, the revenue/cost recognition and cut-off tests are very important. Accordingly, the auditor gives a list of sales and purchases he wants to test. We provide all supporting documents to verify the propriety and accuracy of each transaction. After a little while the auditor knocks on my door with a bunch of papers in his hands. "How do I know," he asks timidly, "if these invoices have correct dates?"

Inside my head I scream, "Are you fucking kidding me?" But this is not about my frustration, this is about my client. So, I calmly explain that he needs to compare the recording dates with the source documents proving the product's ownership transfer as defined by Incoterms. I go further and demonstrate with one of the selected items: this sales order states CIF (cost, insurance, freight), which means that the customer owns the product as soon as it's loaded on the transport; hence, your source document is the Bill of Lading (BL) attached right here to the Commercial Invoice and the Packing List; the BL's date is the sale's date.

He soon comes back with another file and he is very apologetic, "I am sorry, could you explain this to me again? I never heard of those… terms… before. What did you call them?" I help him out, "Incoterms?"

Will somebody, please, explain to me, since when it's Ok for an auditor, who is responsible to lenders, investors, and other outside users to verify the correctness of books and records, to come to the client without the full knowledge required to perform his tasks? Why is he not even embarrassed to admit that? Why the hell in 2012 it did not occur to him to get his ass onto the world wide web, as soon as he heard the word "Incoterms" from me, and study them?

I guess, that would be too much to ask. Hey, he didn't even know what a "metric ton" was and asked me for the ton-to-pound conversion ratio instead of finding it by himself. He continued coming over, I continued providing him with definitions and rules. At some point he got so comfortable with this teacher-student setup, he even asked my advice on how to "test for prepaid expenses." Seriously? Did he forget that I was their from the client's side, essentially being audited?

And here I have to bring up my book again. There is Chapter 29 in "CFO Techniques" called Choose Your Auditors Wisely… Dear business owners, CEOs, CFOs, and controllers, please, read it if you want to avoid paying $25,000 – $100,000 (average range for small businesses) for low-quality accounting services.