The Evolution of the Audit Process

By this time, your annual audit is either complete or winding down.  You have documented the auditor’s requests and considered how you could make the process easier next year.  You may have had your exit discussion and are in the process of considering how and when to implement any suggested process improvements.  In year’s past, that was it, until you received your engagement letter next November/December.

But this year may be different.  One change being discussed may alter the process, in the next twelve months –

In August 2011, the Public Company Accounting Oversight Board (http://pcaobus.org) released for comment PCAOB Release No. 2011-006, which proposed an audit FIRM rotation.  PCAOB questions how objective an auditing firm could be if the audit firm and the client have had a long-standing relationship.

As of March 24, 636 letters were received, i.e. some for the proposal and some against.  The comment period will stay open until April 22, 2012.

This proposal represents a more stringent requirement than the one imposed by the Sarbanes-Oxley Act (2002).  As a way to ensure independence and objectivity of audit firms, Sarbox requires senior managing audit PARTNER rotation every five years.

The primary objection, for those that oppose the PCAOB proposal, are that as you shorten the time of engagement, you lose the expected efficiencies and cost savings associated with a long-standing relationship.

According to a study entitled “Audit Partner Rotation: An Analysis of Benefits and Costs” audit partners reported that it required two-to-three years before client familiarity was established.  Based on this research, audit clients only receive the benefits of an established audit relationship for two years, prior to a partner rotation.  At this early stage, Firm Rotation research is spotty.

Even though these actions technically are imposed only on public companies, it would be prudent for a CFO to take note.  Quickly when business methods are adopted and accepted by key stakeholders, they have a way of becoming a “Best Practice,” i.e. a business requirement that is expected, but not legally based.

What is your experience?

Author: Regis Quirin
Visit Regis's Website - Email Regis
Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.

Should a business invest the time and resources in developing a Business Continuity Plan?

The reality is that a majority of small businesses do not have a plan.  As part of the Wells Fargo Small Business Index, Topline, 3rd Qtr 2011 survey, a sample of small businesses were asked if they “have an emergency plan in place in the event your local area experiences a major disaster, such as a fire, tornado, hurricane, earthquake, major flooding, or other disaster?”  While 41% have a plan, 58% do not.

In the not too distant past, natural disasters have exacted an economic toll in the billions of dollars.  Recent disruptions where the costs are still being tallied include Hurricane Katrina (2005), BP Gulf oil spill (2010), Hurricane Irene (2011).  In all of these examples, there was some type of warning prior to the height of the disruption.  Admittedly these events could be considered once, in a life-time situations.

However, there are disruptions that occur with some frequency, that do not have any warning.  In 2010, there were 3,419 power outages across the United States (Eaton Corporation’s Blackout Tracker Annual Report for 2010).  According to Price Waterhouse, after a power outage disrupts IT systems – “33%+ of companies take more than a day to recover; 10% of companies take more than a week; and 90% of companies that experience a computer disaster and don’t have a survival plan go out of business within 18 months.”

Every business should have a plan that considers the possibility of disruptions directly to its business; or disruptions to the business of its suppliers.  The only question – How extensive should the plan be?  The program you implement can be as extensive as creating redundant operations;  maintaining business interruption insurance to cover the physical loss of the place you conduct operations;  and maintaining contingent business interruption insurance to cover the physical loss at key suppliers, which may impact your business.  But it does not have to be.

There are simple measures a business can put in place that have little or no cost:

  • Maintain records in an electronic form and back-up the data on a set schedule.  This last part is critical.  Large companies back-up data daily.  A small to medium size company should back-up data, at least weekly.

 

  • Review your company’s insurance policy – do you have a specific policy for hazard and flood insurance?  Find out what you are covered for, prior to needing the insurance.

 

  • Create a Plan in the event of a disruption –
  1. How will you communicate with your customers?  What type of messaging will you send to them?
  2. How will you communicate with your employees?
  3. Where will you work in the interim?
  • Share the plan with your employees and maintain the document in a location where they may access it.  Update the plan as factors change.

 

  • Maintain a list of key contacts and update it consistently –employees, customer, vendors.

The risk a company assumes by not having any type of plan, far outweighs the cost in time and money of implementing these simple tasks.

What is your experience?

Author: Regis Quirin
Visit Regis's Website - Email Regis
Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.

What is the proper way to roll-out an ethics program?

In my experience – Ethics policies are tucked away within a company’s code of conduct.  Prior to year-end, every employee is required to go and review the policy and click on a little button on the bottom that states, “Accept.” Employees open the training material and go right to the last page and press accept on-line.

According to the 2011 National Business Ethics Survey® (http://www.ethics.org/nbes/files/FinalNBES-web.pdf), the increase in training observed from companies surveyed, has not resulted in a noticeable reduction in abuses.

Select Survey Results
The proliferation of ethics standards and ethics training increased 2000 2003 2005 2007 2009 2011
Written standards for ethical conduct 79% 68% 83% 83% n/a 82%
Training on company standards of ethical workplace conduct 54% 50% 65% 75% n/a 76%
But the impact is questionable
Pressure to compromise their company’s ethical standard is flat 14% 11% 11% 10% 8% 13%
Abusive Behavior declined slightly 24% 22% 20% 21% 22% 21%
Discrimination is flat 16% 14% 12% 13% 14% 15%
Stealing is flat 13% 13% 12% 11% 9% 12%
Falsifying time reports or hours worked declined 20% 22% 16% 17% n/a 12%
Sexual Harassment declined slightly 13% 14% 10% 10% 7% 11%

Clearly there are many factors that can have an impact on the statistics presented.  However, six data points for each criteria, over eleven years is significant.

So if the process of annually checking a box, prevalent in many organizations, does not work, what will be successful?

Raytheon Company (http://www.raytheon.com/responsibility/stewardship/ethics/ethics_over/index.html) claims they have a process that is yielding success.  The program includes the following elements –Offer Ongoing Ethics education – Annual, peer group training sessions where real workplace issues are discussed; periodic e-mails to staff, which review ethics situations; and on-line learning modules for completion are distributed; Advocate ethics activities within the community; Establish an Ethics office, to allow for the reporting of abuses, by employees, i.e. whistle blowers; and, Create metrics and track progress.

What is your experience?

Author: Regis Quirin
Visit Regis's Website - Email Regis
Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.

The Voice of the Customer

By definition, entrepreneurs go into business to provide a product or service desired by the market, based on their view.   It is very important to understand your customers’ buying habits and changing desires.  Without this information there is a possibility that the products and services you develop do not perfectly align with the market’s needs.

There are multiple types of survey formats, depending on the survey goals.  At a minimum, every business should be involved in conducting:

  • Transaction Survey – survey the customer’s experience regarding a recent service provided or purchased.  Common questions include overall satisfaction, willingness to recommend, satisfaction with eight to ten aspects of the sale process, ideas to improve the product or service.
  • Contact Survey – survey the customer’s experience when they called your Customer Service department recently.  Common questions include wait time, were your question(s) resolved, satisfaction with eight to ten aspects of the customer service process, ideas to improve the service.

At the end of both surveys, respondents should be given the opportunity to provide their personal information and request a call back.  This requires results to be reviewed when received, and personal calls made to the respondents in a timely manner, if that is what was requested.

The data collected should be analyzed and monitored, to identify product or service change recommendations.  The information should also be used to set satisfaction levels today, allowing you to gauge improvements or to quickly identify problems, over time.   Survey results and comments can be added to your marketing message or posted on your web site.

Businesses that are unsuccessful at this strategy run the risk of planning for more revenue than occur; and wasting valuable cash resources on developing and maintaining products or services not wanted by customers.

What is your experience?

Author: Regis Quirin
Visit Regis's Website - Email Regis
Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.

For a Business – Cash Flow is King

Cash Flow can be considered a barometer of the financial health of any business.  An effective cash flow policy includes planning and management.  In a perfect world, your monthly revenues cover your monthly expenses and leave a surplus, i.e. a profit that increases cash reserves.  But the perfect world is a theoretical place.

In reality, businesses have cycles.  Retailers that survive lean months are able to benefit from the peak shopping season that occurs from the end of November through the early part of January.  Drug companies invest large sums of money today in research and development, to offer a medicine in the future for a finite time period, prior to patent expiration.  These are examples of industries that excel at the planning and management of cash flow.

But the benefits of proper cash flow management or the penalties of poor planning can affect companies of all sizes.  Drains on a company’s cash flow fall into two categories –

  • Controllable – expenses where management has a potential impact, which include – salaries, rent, advertising and marketing, travel & entertainment expenses.  This impact can be defined as controlling the amount of the expense or the timing of the expense.
  • Uncontrollable – expenses where management has little or no ability to impact, which include delayed payments from individuals or companies where you extended credit i.e. customers 60, 90, 120 days past due.

Poor cash flow management will impact a business by constraining its ability to fill orders timely if inputs and/or inventory purchases are delayed; replacing outdated equipment; and, implementing process improvement which historically has upfront costs, prior to the savings.  As a result of these issues, a business may be forced to seek financing from a lender; and/or, seek outside investors.   If unsuccessful at these activities, the business may need to close its doors or sell to a competitor.

In my experience, the best way to avoid these business constraining impacts is to ensure an annual budget is established.  Subsequently, monitor actual results to understand if these results are in line with your expectations.  Monitoring should occur monthly with the results reviewed with senior management.   If needed, expectations should be adjusted to account for any unanticipated business change.

Even after all the planning, it is prudent to maintain a cash reserve cushion.  The proper size of this cushion is dependent on the business.

What is your experience?

Author: Regis Quirin
Visit Regis's Website - Email Regis
Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.

Vendor/Contract Management, a Controlled Risk

Companies primarily outsource when they need a service or expert, in a field that is not their specialty.  Financially it makes sense to bring in the expertise on a contract or assignment basis, rather than building the functionality within the company.

Prior to entering into any relationship, keep in mind, that there are concerns depending on the type of vendor you hire.  There are an endless number of service providers today, which include legal services, financial services, human resource services, technology services…  Every service includes its own specific risks which must be identified.  But risks common to all vendors include –

  • Employee quality – vendor employees requiring special knowledge, licensing, certification;
  • Privacy policy – sharing information regarding your processes and procedures, as well as customer information;
  • Business continuity – impact of a disruption in your vendor’s business on you; and,
  • Service quality – impact on your internal and external customers.

Vendor/contract management represents a Risk that should be managed and controlled actively.  Establishing your requirements and how you will work with the vendor, prior to entering into a relationship, would be time well spent.  General activities include –

Due diligence – Vet potential suppliers both individually and against their competitors.  Request references and perform a site visit.  Does the vendor have the ability to provide the services within the committed timeframe required, i.e. expertise and financial viability?  What systems does the vendor use and are they secure?   Are background checks performed on the vendor’s employees?

If you are satisfied after this review –

Draft Contracts – In addition to roles responsibilities, timeframes, payment terms, termination provisions, consider including a reciprocal nondisclosure agreement to cover the confidential information of both parties; requirements to maintain current knowledge and best practices, as well as maintain licenses and accreditations; Service Level Agreements with escalation process; and Liquidated damages in case of a breach.

Once contracts are signed, vendor activities must be monitored to ensure that elements of the contract are followed by both parties.

Measure Performance (Short-Run) – Closely monitor and assess the success at transitioning the vendor into your standard operating procedures.  Issues that arise should be dealt with immediately.

Measuring Performance (Long-Run) – Establish metrics to measure the vendor’s performance ongoing, this may include time lines, rate of conversion, and problem resolution.  Establish a survey process to understand the success of the initiative, ensuring your expectations are being met.

These general tips provide a framework to begin the process of hiring an external vendor.  As stated previously additional areas to examine will be related to the type of outsource provider you wish to employ.

Lastly, there may be a point when it makes sense to build the infrastructure within your organization. It always helps if you are able to understand that point prior to entering into any relationship.

Author: Regis Quirin
Visit Regis's Website - Email Regis
Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.

Bridging the gap between Sales and Finance

The sales and finance relationship is tricky, but necessary.  The Sales Team interacts with current and potential customers.  The Finance department is responsible for ensuring the company’s cash flow can support Operation’s efforts to meet these customers’ needs.  Following is an approach to make the partnership easier –

Establish Process with Controls

Sales activity should be flowed out to identify bottlenecks and risks.  If need be, policies should be established.  For example, it is difficult to ensure that decentralized national sales forces obtain the proper approval signatures from both the client and senior management.   A process should be established with timelines to make sure all approved documentation is collected and retained in one central location.  If during the course of the relationship, legal proceedings are necessary to ensure the collection of outstanding debts, these executed contracts will be required.

Production Planning

At the beginning of the year or at the time a new Sales Manager is hired, a full twelve-month sales plan should be established and approved by the Sales Executive.  The plan should include discounts offered and expected Marketing dollars utilized.  Expect that increased discounts and marketing dollars will be needed in highly competitive markets with a strong competitor(s).

Model Development

The most successful sales team I worked with was provided a simple financial model in excel, for their use.   Areas requiring variable inputs specific to the relationship were yellow shaded.  With this tool, sales personnel could easily input the variables missing and see the value of the relationship, at the point of sale.  Slowly but surely the sales team began to understand the drivers of revenues and expenses, when establishing a relationship.

Escalation Process

There will be situations when the model does not show the relationship is as profitable as required, by Finance department standards.  In this case, if the sales manager believes that the relationship should be established for strategic reasons, they need to have the ability to escalate the approval.  There are times when entering a relationship which is not as profitable initially, makes sense after some seasoning.  Other reasons may include a new product/program introduction or establishing a referral relationship.

Activity Tracking

Sales activities should be tracked via a sales manager specific scorecard which shows each individual and each of the contracts they manage.  Examples of items to be included  – revenues less discounts used, less marketing dollars used, customer service hours provided, commissions paid…  When this information is presented in one document, it is possible to see the profitability of every sales manager and the profitability of each relationship.

Scheduled Meetings to Discuss Results

Tracking reports should be discussed at monthly Sales meetings that include the Sales Executive and the responsible Finance Executive.  As the Sales Manager is intimately involved with the relationship, details not obvious by “the numbers” can be learned, which may impact collections and the future of the business.

The process established above provides a controlled, risk free way to achieve sales.  As outlined, finance will not be surprised by the results of the sales team.  Sales Managers will  have the independence to achieve company and personal goals.

What is your experience?

Author: Regis Quirin
Visit Regis's Website - Email Regis
Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.

Time for a resurgence of Market Research

Since the start of the December 2007 recession, as declared by the National Bureau of Economic Research, companies have had to reduce expenses, due to falling revenues.  Strategies included – reduce staff, consolidate locations, scrap projects…

A strategy that worked for me in the past was a review of contracts outstanding to understand if the items promised in the agreements were being fulfilled.  As a result of this review, 42 non-active strategic relationships were terminated for a monthly savings of $63,000; and a contract was terminated with a data vendor that was not providing what was promised, for a one time savings of $37,000.

Cost cutting is getting more difficult.  The risk of cutting costs at the expense of quality becomes greater.  As such, I recommend that prior to any cost cutting action, the opinions/views of your customers are considered.  Studies should be conducted to understand –

  • Satisfaction – overall, product, customer service
  • Brand perception
  • Pricing strategies
  • Timeliness of delivery
  • Policies for returns and exchanges
  • New products and services

Research methods that could be utilized include –

  • Post Purchase surveys are great ways to quickly gain immediate customer feedback, i.e. within 30 days of sale/service.
  • Contact surveys are great ways to quickly gain immediate customer feedback, i.e. within 30 days of the last contact to your customer service or help desk.  The reason for the contact is also great information.
  • Focus groups are an excellent way to collect customer information on current products/services provided, as well as future concepts for consideration.

There are many different study types.  But based on the aforementioned studies you should understand what your customers value vs., what they do not consider important; understand if the customer is willing to recommend; and request Testimonials that you can use to capture new customers.

So what is the process –

  • Write the questions
  • Pilot the questionnaire to ensure that the results you are getting, answer your needs
  • Distribute to the full population
  • Tabulate the results and analyze
  • Use the data for process improvement and product development

What is your experience?

Author: Regis Quirin
Visit Regis's Website - Email Regis
Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.