Effective Auditing and Training

Effective auditing in the 21st century requires an approach more technically sophisticated than many firms have been willing to commit. Firms like Macias Gini & O'Connell handle many government clients – entities with thousands of employees processing hundreds of thousands of transactions.

"You've got all these electronic files," said Jim Godsey, managing partner. "I need help. I need the intelligence of the computer to sort personnel, to sort dates, sort locations. And every time I see one of those sorts, I see something I haven't seen before. As the auditor, I will know when these things are right and when they are wrong." When Godsey was introduced to data mining in the mid-1990s, his immediate impression was, "This is what auditing should be all about." He became for a time the firm's director of training. Godsey credits the firm's willingness to dive into data mining for the partnership's competitive advantage over other firms. Still, where accounting firms do take on data mining, they often do not go about it in the best way.

The lack of a commitment to the training required separates the cutting-edge firms from the rest, said Gary Boomer, Chief Executive Officer at Kansas City-based Boomer Consulting Inc. A champion of developing intellectual capital in accounting, Boomer has a critical eye for weak management strategies.

"The not-so-good firms are missing structure – of which a training program is a big part," Boomer said. “In the past, the pattern was small firms hired from the Big Four with the idea they would have already been trained." Labor shortages disrupted that strategy and small firms found themselves increasingly hiring accountants straight out of universities. The common practice has been to expect them to learn data analysis on their own time, and with little if any company support. However, a Gartner Group study found that for every hour a firm invested in training, it reaped 5.75 hours of increased productivity, Boomer said. So, why short-change or ignore the issue?

Accounting firms implementing software programs tend to end up with cost overruns – usually because poorly trained staff spent unnecessary hours on experimentation and on repairing work compromised by human error. Another common short-cut that tends to backfire is reliance on a so-called "power user." This is the person the company sent for classroom training. He or she returns to train the next person, who then trains the next. Boomer calls this the "random walk." "Remember the communication exercise where a group is lined up and the person on one end whispers a word to the person next to him? By the end, the word bears no resemblance to what they began with. That's the problem with the power user, pass-it-on training; there is no consistency."

The power user that took a three-day course under an expert cannot know as much as the expert. He then returns and condenses the course to one day, and the company thinks it is saving money, Boomer said. The pitfalls of pass-it-on training reveal other problems. Some accountants are not natural teachers. But even those that are good teachers remain under the pressures of the firm's common work practices. "As an industry, we tend to value the chargeable hour. Training fellow staffers are not part of the compensation plan," Boomer said. "So accountants focus on tasks that are billable and tend toward short cuts when directed to train others."

Unfortunately, trends in training have not changed for the better. In reaction to the recession, companies cut back on training. Where training persisted, it was often modified to webinars as a way to cut travel costs. Boomer sees value in webinars geared for simple software programs, but their usefulness is limited when dealing with something as technically complex as data mining programs. The best firms, Boomer insisted, show a greater commitment to classroom training, and they develop learning ladders – a series of skill sets that are to be mastered over a quantifiable time period.

Carol Ursell is training director for Audimation Services Inc., which distributes IDEA, one of several data mining programs on the market. Audimation Services offers public classroom training, seminars and on-site courses. Of the three, firms tend to prefer on-site courses for their flexibility, Ursell said. One stumbling block to learning is a trainee taking generic situations and finding it difficult to relate that to their world.

"Public training is very generic," Ursell said. "With on-site, we don't have to stick to an agenda. We are willing to actually work with the client's data. If someone has a specific project they want to use IDEA for, we can do it right there in the class. Students bite into that."

But effective training is a bit more involved than a firm committing to sending accountants through a classroom. If the partners do not grasp the power of data mining, and if the firm is not prepared to retrieve electronic data, money spent on training could be money wasted. "If the decision-makers don't get involved in the implementation, but only send worker bees, change is difficult to make happen," Ursell said. Although Ursell is not in sales, decision-makers going through their due diligence will have opportunities to talk to her. Ursell always asks them what they expect data mining to do, and whether the firm gets data electronically.

It sometimes comes as news to a managing partner that computer analytic tools are not designed to help them replace a ten-key calculator when tackling a foot-high stack of green bar paper or a print-file they thought was uncapturable. "That's the wall that exists; they're locked into that printed output template," Ursell said. "In these situations, I will often stall them. This kind of training is a use-it-or-lose-it skill."

Until a process is in place to acquire electronic data, the firm risks any training going stale before its employees get a chance to use it. Having put the cart in its proper place behind the horse, Ursell then encourages decision-makers to sit in and observe class.

"They don't have to work on a computer," she said. "Rather, they can observe, so they come to understand the power of analytics and how their work can change."

Data mining with good analytic tools changes everything, Godsey emphasized. Consider that the only alternatives are random sampling and more aggressive interviewing procedures – both of which tend to underwhelm board members when it comes time for audit closing meetings. "The profession is relying heavily on internal controls. In a large company with a lot of transactions, you're not in a good position with random sampling," Godsey said. Audit closings based on random sampling get couched in theoretical terms; they describe probabilities of risk that are not well understood by the board members, he said. "It's not as pressing as actually showing them, 'Here are 500 transactions where your policy says these should have been getting a second approval and that approval is missing.' People at the board level, they're fascinated by that. Their reaction is, 'Whoa! That's impressive.'"

Finally, data mining using the right stuff also affects a company in terms of talent scouting and retention. Sooner or later, strong performers will gravitate toward like-minded talent. When Pat Lonsdale was considering leaving Ernst & Young for a smaller, regional firm, a top consideration was landing somewhere that showed a commitment to state-of-the-art resources. He moved to Padgett Stratemann & Co. in San Antonio in 2003. "What I found was Padgett Stratemann is at the forefront in terms of technology," said Lonsdale, now the CPA firm's senior manager. Data mining was new to the company when he got there, but he saw going in that the partners were determined to incorporate the analytic tools the right way.

Boomer, ever preaching the gospel of empowering accountants with tech tools, sees companies that do not invest in them as the weak links in the profession. If decision-makers buy into the concept of training as part of the firm's culture, the whole organization gets smarter, he said. "If people do not buy into it – they go on that random walk – the training in place can spiral downward and the whole organization gets dumber. And the talent in that situation leaves," Boomer said. "People want to be employable for a lifetime. So, talent wants to get out of a bad situation."

The best solution for firms that want to implement data mining tools for more effective (and profitable) audits is to first understand how their use changes the process of conducting each engagement. You can’t mine the data without obtaining the data. And you shouldn’t add data mining to existing procedures – rather identify the procedures you can skip because you have the power of analytical software. Not everyone needs to be expert at getting data, but each person who uses the data to select items to examine or to perform the analyses that will identify anomalies must know how to use the software. Analytical procedures are much more powerful and cost less in time than substantive tests of a sample. Effective auditing requires the right training at the right time. You simply can’t have one without the other.