One of the benefits of having been around for a long time is that you have an appreciation for just how far things have come. On the other hand, you also have insight as to just how far we still have to go. During this post, I’d like to remind everyone of how good we have it yet at the same time expose where we have perhaps missed the boat or have yet to fulfill technology’s promise. This post will not address performing an EDP audit or an audit of a company’s MIS systems. It is intended to address how the field examiner utilizes technology that is prevalent and easily accessible.
The Way We Were
First lets talk about how things were. When I started auditing in the early-mid 1980’s laptops were non existent and portable computers were extremely costly, rare and not so portable. Audits were done on 14 column analysis pads. Calculations were done on a 10 key calculator and all entries were done by hand. Reports were not the 30, 50 or 70 page missives that we have today but rather a form that averaged 10-15 pages and that was often filled out by hand.
I remember auditing a Stevedoring firm (a firm that loads and unloads container ships as they come into or leave port). The receivables for this firm were organized so that each port had its own aging and AR subsidiary reports such as sales and cash receipts journals. The firm serviced approximately 20 ports. Performing the AR roll forward for each port and then combining the ports to get a consolidated AR turnover and dilution measurement took the better part of a week!
In general, a company that consisted of one set of books and records took 5 days of field work for a review, surveys took 10 days. The scopes both in terms of procedures performed and number of items tested were generally less then they are today; however, the major procedures done today were also done then. This is especially true for procedures involving the underlying collateral such as AR roll forwards or statistics, aging summaries, concentrations, shipping tests, credit memo reviews, test counts, cost tests, and inventory spreads.
Laptops and Spreadsheets the Holy Grail!
When laptop and notebook computers became popular, the application of these tools to the performance of field exams was easily apparent and they were quickly adopted by field examination departments throughout the lending industry.
Initially laptops and spread sheets were used to mimic how the audits were done manually. Processes that were done manually, in essence were still done manually, although entries were in general much more legible as they were entered into a spreadsheet instead of hand written. “Power users” were individuals that could get a spread sheet to total a column of numbers and other simple calculations.
Eventually lenders and examiners began to realize that standardization of certain processes would benefit the audit process and make it much more efficient. Several lenders put together templates that standardized their internal audit policies and practices. Most of these templates consisted of a preformatted spread sheet developed by the aforementioned power user with formulas for common calculations already entered. In general, the format or layout of these templates were very similar to the work papers prepared on analysis pads.
Making Progress……kind of
With the standardization of the major schedules/work papers and the continued development of spread sheet software as well as the auditors proficiency in using them, the auditing process became much more efficient. Audits that used to take 8-10 days could now be done in 5-7 days. The audit reports started to change as well. Most lenders enhanced reports to include graphs and more tables that summarized audit findings.
The Here and Now
Nowadays most lenders have spreadsheet templates that at the very least perform some of the mundane calculations such as totals, percentages and counts.
“Advanced” audit packages have macros for reports that easily import spreadsheet tables or graphs with just a few mouse clicks.
Sadly, that is the extent of the vast majority of templates and packages available. The foundation of the “automated collateral exam” is, unfortunately, still based on those 14 column analysis pads.
Where is my flying car?
Throughout my career as a field examiner and audit manager I have embraced technology. I like to think that I have helped my peers, employers and employees use technology in ways that they had not done so before. I created one of the first automated audit programs to be used by a major lender and have continued to refine it throughout my career. However, there is so much more available today that most lenders still do not take advantage of. Here is my wish list of what I would like to see developed. All of these items have been used by examiners at one time or another, but there is still not one comprehensive system that allows for all of these items to be used together and seamlessly. In addition, most of these items are not used on a consistent basis. To be truly automated, I think that not using the items below should be the exception and not the norm.
File sharing – There are several methods for sharing date, we have “data rooms” “folders” and “spaces.” Unfortunately the use of these tools during field exams is rare and if used, they are not used to their full capacity. This is especially curious as several of these items now allow for the automatic posting or back up. Why not have an examiner’s files backed up automatically to a centralized location? The benefits would include:
- Having a central location for a prospect or client to post electronic files. Why not start the “field” exam from the office, using files posted to a central depository by a client. We no longer need to be in the field for the entire field exam.
- Having an automatic backup of the audit files off site. This way if a lap top crashes or worse, is stolen the audit can easily be continued
- Audit management and perhaps underwriting and credit managers would have access to the audit work papers. Why wait for a report to review an auditors performance? Wouldn’t it be more effective to review work papers while the exam is in process? If underwriting needs a specific metric, why not give them access to completed work papers?
- Windows Live Sync can be used to post updates to a central shared folder effortlessly.
Webcams – Webcams have almost become standard equipment on most laptops. If they are not, they can easily be added for a nominal price (under $100). I have never seen a web cam used on an exam, but I can easily see the day when webcams are used for both client calls as well as progress calls back to the home office.
- Visual cues are an important part of the communication process, by having conference calls on camera, all users can have a better understanding of what is being communicated.
Digital cameras and camcorders – Audit reports can be much more informative and appealing with the use of pictures and videos. I would like to see reports that include at least some these items to a greater extent then just pictures of warehouses and inventory. Some of the applications that I think could be easily employed are:
- Recordings of management conversations. Rather then having management explanations merely typed into a document, why not have a recording of management’s explanation embedded in the document as well?
- Pictures of Client Management. If there is a contact list included with the report, why not include a picture of the person as well? For credit managers this can be quite valuable as on new business surveys or for accounts recently assigned to them, they will be able to easily recognize client management prior to actually meeting them.
- Videos of manufacturing processes, plant tours. Taking a plant tour is an important step in understanding the business and the company’s operations. Having a video of the tour will allow the examiner to revisit the tour as often as necessary. In addition, videos could be embedded into the report. How much more effective would the description of a certain manufacturing process be if there were also a video of the operation being described included in the report?
Metrics – This area that may be toughest and most costly to implement, as the infrastructure (to my knowledge) would need to be developed by a lender. However, it is also probably the most important and beneficial. Audit departments have a vast amount of data at their finger tips. Unfortunately this data is usually left undeveloped and untapped.
- Historical audit data – Imagine being able to easily obtain the following information prior to starting a field exam for not only the prior exam but for all exams performed on an existing client or clients in the same industry
- Key metrics such as dilution, AR, AP and inventory turnover for other company’s in the same industry as the company being audited
- Key risk concerns such as existence of pre billing, slow moving inventory, credit memo lag, vendor rebates, contras, etc. etc.
- Customized scopes – Having the historical knowledge of both prior audits of the company being audited as well as other companies in the same industry could allow for the customization of audit scopes. Areas of concern could be more easily concentrated on while other areas could have the scope of audit procedures reduced.
- Automated customized scopes could be developed utilizing the metrics obtained for prior audits and audits performed on similar companies.
Smart Systems – Automated review of audit results. Similar to the above, this area is also relatively hard to implement as it requires a substantial investment. However, truly automated systems could be used as follows:
- Identification of positive and negative trends. Examiners could be notified automatically that a certain area requires additional attention based on audit results For example if dilution is showing an increasing trend, perhaps the scope of the CM review would be expanded.
- Identification of spikes in certain metrics. Examiners could be notified automatically if a particular period’s results were outside normal parameters. For example if AP or AR TO were to drop or increase unexpectedly, that month’s cash activity could be given additional attention.
- Identification of audit exceptions and specific risk areas. Examiners could be reminded to obtain explanations for pre-billed invoices, excessive CM lag, cost test variances, etc. etc.
The link below is to a PCWorld article that describes some free web tools offered by Microsoft. Of particular relevance to the above are: Windows Live SkyDrive, Windows Live Sync and Microsoft Office Live Workspace.
http://www.pcworld.com/article/159413/article.html?tk=nl_wbxnws
