Henry Ford once said that if he had asked people what they wanted, they would have said faster horses. Constant innovation keeps businesses thriving. Ford Motor Corporation has created a prototype for a baby crib that simulates a moving car, complete with gentle engine sounds and a streetlight sensory feature. Every parent who has grabbed their keys and circled the block to calm a fussy baby is applauding their innovation.
Another shining example of innovation is Apple, which has (once again) smashed the competition by developing a smart phone with beautifully designed interface, cordless charging, durable glass and facial recognition features. Apple has everyone reaching deep into their pockets to get the latest and greatest version of a product that never fails to evolve.
Regardless of your industry or role, there are plenty of opportunities to get creative and improve processes to increase your productivity. The Lean Six Sigma methodology is gaining favor in the auditing and accounting professions for its potential to improve operational efficiency and audit quality. Lean Six Sigma provides a framework that can be applied to Define, Measure, Analyze, Improve and Control (DMAIC) any business process or objective. It focuses on reducing and eliminating waste, lowering defects in products or processes, and improving customer satisfaction.
The Origin of Lean Six Sigma
Lean Six Sigma can be traced back to Motorola engineers who decided that the traditional methods for measuring defects in thousands of opportunities were insufficient. They set out to measure defects per million opportunities by developing a new standard and creating a new methodology along with the cultural change to achieve their goals. Their demand of higher standards and quality helped Motorola achieve more than $16 billion in savings. Tens of thousands of companies throughout the world have adopted Lean Six Sigma as a way of doing business.
How it Works
The fundamental objective of the Lean Six Sigma methodology is the implementation of a measurement-based strategy that focuses on process improvement and variation reduction. Lean Six Sigma seeks to improve the quality of process outputs by identifying and removing the causes of defects (e.g., errors) and minimizing variability in business processes by using a set of quality management and statistical tools.
How Audit is Applying Lean Six Sigma
The audit process is similar to the assessment process and involves the use of checklists and questionnaires to help auditors assess the existing status of business processes or activity. Those are compared with predetermined standards or desired results. They are also used to determine whether a particular process is being followed or not, and to help assess how well a particular process has been implemented. Variations are recorded and utilized to find out the exact causes.
Accountants and auditors understand that numbers have a story to tell – well beyond sampling and fraud detection. By pairing the Lean Six Sigma methodology with data analytics, there are untapped opportunities to uncover efficiency and quality control improvements.
HBK CPAs & Consultants Applies Lean Six Sigma
During the most recent IDEA User Conference, Craig Steinhoff, Principal with HBK CPAs & Consultants, shared some examples of how his firm applies the Lean Six Sigma methodology along with CaseWare IDEA® to improve and expand client relationships. While IDEA is widely used by auditors to combat fraud, waste and abuse, its potential to improve operations and processes are virtually limitless.
Steinhoff provided an overview of lessons learned from infusing Lean Six Sigma methodologies into their client work:
- Become the Trusted Advisor – Think and act as an advisor by setting out to make the organization a better place to work. Look for ways to improve or change an existing process to make it more efficient.
- Continuous Improvement – Eliminate waste and wasteful practices. Pull away from a compliance standpoint toward proactive thinking. Look for opportunities to proactively increase efficiency, such as reducing the amount of days from when you leave a field audit to when the audit is issued.
- Welcome Ideas – Apply the old adage that two heads are better than one. While not every idea will work, any idea is a possibility to explore.
- Adapt – Companies like Amazon, which started as a book retailer, are constantly evolving and expanding. Those that fail to innovate will eventually close their doors, like Blockbuster which clearly missed the opportunity to follow the movies on-demand revolution.
- Embrace Change – Not everyone likes change, but it is a necessary part of sustained growth. Think differently about how things get done. What can be done to tighten up existing processes? Envision a new and unique path towards growth.
- Form research committees to explore new ways to adapt to ever-changing markets and customer needs
- Set a goal to implement achievable changes
- Discuss what was successful, and what was not (including why)
- Poll and interview clients – then make changes
- Eliminate the “same as last year” approach to audits and increase the frequency of audits by embracing continuous auditing techniques. Give clients the tools they need to evaluate information.
While not everyone will earn a Certified Six Sigma Belt, the idea is to explore new ways to use technology to improve existing processes and look for opportunities to achieve higher levels of efficiency across the organization. HBK, which services clients spanning various industries, uses IDEA in some unconventional ways to add value including:
- Mergers and Acquisitions – Many “baby boomer generation” clients are looking at exit strategies for businesses they founded. IDEA has been used to perform due diligence work on both the purchasing and selling of businesses.
- Asset-Based Lending – The firm offers a menu of services including receivables, inventory, price testing, aging of accounts, etc. – all using IDEA’s functionality to perform these tests.
- Employee Benefit Plans – Identify ineligible participants based on employment dates and employee status parameters across all plan types.
- Obsolete Inventory – Use IDEA to analyze
- Last date sold for products
- Changes in quantity (look for over or under production)
- Inventory turnover
- Order dates vs. fulfillment and deliver dates – look for opportunities to reduce fulfillment times
- Purchasing – Amount of inventory on hand (too much or not enough)
- Returns – Which products are being regularly returned? Was there a change in the vendor or product quality?
- Revenue Analysis - Ratios and pricing: Review contractor jobs by type and gross profit to determine whether some jobs have higher profit margins. There may be opportunities to market those services and/or products to increase profitability.
- Expenses & Vendor Contracts – Explore purchasing power opportunities. Is the company ordering supplies from multiple vendors when they could be consolidated or negotiated?
- Purchasing Cards – Is AP cutting small reimbursement checks when it may be more efficient to implement a p-card program?
- Terminated Employees – Are they removed from payroll?
- Reporting – How long does it take staff to run and/or create monthly reports? Is it an area where IDEAScripts might be used to shorten the process and delivery time?
- Waste – Does a corporate fleet of vehicles have excessive repair or warranty expenses? Would it be more cost effective to purchase hybrid vehicles to save on fuel costs?
- Healthcare Costs – Electronic medical records are a prime area for using data analytics. Is Medicare and Medicaid billing accurate? Are claims rejected due to incomplete or inaccurate clinical notes, causing payment delays?
Steinhoff emphasized the firm’s focus on understanding their clients’ needs. He believes there is a myth that clients won’t pay for something they didn’t ask for, but if you can demonstrate value or cost savings, they will jump at the chance to try something different. He recommends starting with these questions:
- Does your company understand the needs of your clients?
- Do your clients understand the value you are delivering?
- Are you delivering value to your clients in the most effective and efficient way possible, limiting the waste of time and money throughout the process?
- Do you think you should be able to do more with your current resources (monetary and human capital)?
Taking a Lean Six Sigma approach can be applied to any organization or process. While many universities offer certification programs, The Institute of Internal Auditors offers Lean Six Sigma training for auditors.
Add Value by Getting Creative
Mark Holle is another IDEA user who has taken an innovative approach in using data analytics to improve both financial and operational goals. As a CPA serving clients across various industries, he actively sought new ways to use data analytics – something he continues today as Director of Finance with an engineering company. Here are some examples he provided to help fellow IDEA users:
Mergers and acquisitions require verification of the value of inventory. Holle received a printed sales report that stood a foot tall on his desk. It was provided to help him determine whether the inventory was worth the stated asking price. He requested the data in electronic form and imported it into IDEA within an hour. After linking the inventory and sales reports, he identified $200,000 in products that had no sales in 18 months. The information helped the purchasing company reduce the seller’s asking price by $100,000.
Another client Holle worked with asked him to review four years of detailed reports to identify variations or errors between the detail ledgers and the general ledger. In a single day, he analyzed 1.2 million records using the summarization feature in IDEA to uncover a host of errors and mismatched invoice numbers.
Busy Season Time Management
Like many CPA firms providing tax services, sufficient staffing for busy season is critical to meeting client expectations. Holle used IDEA to review time records and projected client work, which allowed the firm to pre-schedule meetings for the entire tax season. Staff were assigned to clients based on their workload, then reassigned to other work as projects were completed.
Like many organizations, there comes a time when new systems are implemented. The task of transferring data from old to new systems is a daunting task. Holle used IDEA to export vendor, client and employee data from the legacy system to clean and prepare it for upload into the new system. IDEA’s powerful data extraction and formatting capabilities saved hours of effort and helped with a smooth transition.
When departments cross-charge expenses, it can be difficult to evaluate group performance for budgeting purposes, especially when no report exists in your project or accounting software. IDEA’s summarization functionality helps Holle determine where expenses originated, determine historical trends, and estimate future cross-charging estimates for budgeting purposes.
IDEA has also proven effective for using key word searches to identify un-allowed costs and generating reports that can be used for federal regulatory audits. It has become invaluable for identifying allowable and unallowable costs. Through key word searches, accounts and transactions that are high risk for containing unallowable costs can be discovered and analyzed in minutes. Providing these IDEA reports to auditors has resulted in a high degree of trust between Holle’s staff and the audit team and has helped to determine the list of unallowed is complete. As a result, audit adjustments have been minimized since using IDEA.
The Lean Six Sigma methodology challenges professionals to look across the business for opportunities to improve existing processes, and identify new ways to achieve optimal levels of efficiency. There are valuable insights within the data, and IDEA can help you get answers to critical questions, identify trends and patterns, and test controls or processes that need adjusting. We encourage you to reach beyond your comfort zone and discover new ways to use IDEA in your everyday work. If you hit a snag along the way, call or email the IDEA Help Desk or connect with the Audimation Solutions Development team. We enjoy helping IDEA users expand their use of data analytics to solve complex business problems.