CA(SA) - WAR STORIES - A Post- Mortem Of An Audit.

For all my clients that I have who are in the auditing profession, I admit somewhat sheepishly, that, in my corporate life, I never really enjoyed the audit process. Nothing personal. I just found the process petty, under managed and too focused on irrelevant nonsense. Somehow the overall bigger picture was lost in the detail. Certainly in my corporate experience the audit process added little value and cost an exorbitant amount. 

I'm of the view that the audit profession is facing major disruption and believe it will become obsolete in its current form as the concept of Integrated Thinking develops and becomes more mature. 

But these ideas are not for this article.

So here is my client’s unhappy tale.

He was living in the USA and was appointed the CFO of a large private company which, just prior to him joining, changed auditors from a small two practitioner practice to a well-known medium-sized firm.

The fee charged by the smaller firm had been a modest amount of $140k in the immediate previous financial year.

The newly appointed auditors proceeded to do their own thing, which in the process, took the fee up to $900k.

My client and his fellow directors were flabbergasted by such an substantial increase, but they accepted the amount as a once-off cost in order to get the Group's governance up to scratch.

When the fee in the following year remained at a similar level, everyone threw their toys round and predictably, a post-mortem was called for.

The auditors produced a bulky report justifying their case, weeping about their huge write-off and yet still needing to recover their outrageous final fee.

Needless to say, because he was the CFO, this reflected poorly on my client.

They indirectly accused him of bad planning, poor management and a general lack of co-operation. 

My client was distraught about the whole saga. His confidence was crushed and he was facing a possible dismissal. It was at this stage that he connected with me. We conducted our sessions via Skype.

My initial discussions revealed an experienced and competent executive who seemed to know what he was doing. Accordingly I proposed that we did our own post-mortem in an attempt to get to what had actually taken place. My objective was to help him regain his confidence and reconnect with his own value. 

As a consequence, the following issues emerged: 

• There were 54 individual companies in the Group. Instead of taking cognizance of the fact that the financial information emanated from one system, each company was audited in isolation.This was an outrageous audit decision which had undoubtedly exploded the fee. 
• The audit materiality limit was assessed on a similar basis. Hence the group materiality limit, which was substantially higher, was ignored.This was a preposterous decision taken by a partner who had spent very little time at the client on the initial panning. Of course this had a substantial impact on the fee due to an enormous amount of time wasted on auditing ridiculously immaterial amounts .
• A further decision was taken to do copious amounts of substantive auditing after a $150k compliance audit, revealed major flaws in the adequacy of the systems. This was as a result a 100 pages of management report that was produced pin-pointing these deficiencies. As it turned out, not one of the findings were valid and all it did was reveal how little the audit staff understood about the systems . The draft report was only presented to my client for comment after the audit had been completed. In other words the partner made a call in the entire audit strategy without first confirming that these conclusions were valid.
• In order to expedite the audit, my client purchased the same software drafting package that the auditors' used with the intention of mapping the audit files and drafting the financial statements. However, my client and his team were unable to fathom out what the auditors had done with the mapping in the previous year. After spending 3 months trying to get clarity, it was finally agreed that the audit files would be prepared on management account balances. This obviously would not tie up to the software mapping. Although proper audit files were developed and presented at the commencement of the audit, they were not used at all. Even though they tied up to the trial balance and were cross referenced to supporting documentation, they were ignored. This was after the auditors had confirmed, at the commencement of the audit, that the audit files were adequate for their purposes. 

When the time came to finalize the audit fee my client was horrified at the proposed charge. He was even more aggravated when his boss sided with the audit partner. He was furious at his boss's lack of support and the sheer audacity of the auditor's claims. Furthermore, trusting these relationships, my client had not documented the auditors' inefficiencies, as he had chosen to raise and resolve any issues as and when they had arisen. The auditors, on the other hand, had presented a detailed document justifying their fee and blaming my client for all the overruns on the audit. This was without giving my client the opportunity to make his comments before the document was formally issued to the other directors.

On refection he realized that during the course of the audit he was in daily communication with the audit team and was consistently complaining about the excessive times spent on immaterial amounts. When he queried the audit budget overruns he was assured by the partner not to fret and that audit fee would be adjusted on finalization. He had also informed his boss that he thought the partner was 'milking' the audit. Again he was assured that it would be handled when the final bill arrived.

He also remembered that he had not received the audit budget until well into the audit even after badgering the audit partner on a daily basis. Again he was assured not to worry as the budget was only a guideline would be adjusted accordingly. When the final budget was presented it was outrageous. 

The other very important issue was that the auditor partner had a large public company audit starting after the completion of my client’s audit. Because of the all the wasted time doing the wrong work, the audit staff ran out of time and had to leave before they had completed their sections. Consequently the manager in charge was left with no junior staff and had to spend many hours on low-level work to get the audit finalized. He did a sterling job but that was after many hours of overtime work for which my client was charged at manager’s rate. This huge additional unnecessary cost was piled onto the fee.

The sad part was that due to stress of the whole situation, my client became depressed and despondent. When he had to present his case, he did so poorly and landed up looking incompetent.

Through subsequent sessions we were able to separate his tactical mistakes from his real value as a competent CFO.

I am pleased to tell you that he survived to become a much stronger and more effective executive (and the auditors were subsequently fired!).

But here are some pointers that came out of our discussions which you might find useful:

• When applying for a position as a financial manager, find out about the status of the audit. Walking into a change of auditors’ modality will create unnecessary stress. Prepare for it. 
• When things go wrong, you will be blamed. Always have your facts right and keep copious notes where appropriate. If you hold meetings ensure that minutes are kept. 
• It is vital that the audit partner presents himself at the client premises in early planning stages when strategies are being determined - it cannot be left to newly qualified managers who have no experience on the client. At risk of offending my brothers in arms, it is advisable to make the assumption that the auditors are not necessarily sure what they are doing especially if the audit partner is playing hide and seek. It's a good starting point to accept that you are much more in tune with what they are doing than they are. Question everything!
• Understand that there is a continuous turnover of audit staff and probably most people on the audit do not know your company and have been inadequately briefed. Watch them carefully and keep asking questions.
• If they are doing system checks, instruct the audit manager that any adverse findings need to be reported immediately.This will clear up any confusion around reported weaknesses. Usually there are compensating controls of which they may be unaware.
• Do not allow any auditor on the premises until you have personally signed off on the audit budget. Get a copy of the audit budget and meet regularly to determine progress. If delays are blamed on your staff, ensure that these are resolved immediately. Confirm all decisions via email so that there is a proper trail of the conclusions.
• Aim to manage the audit to come in at 20% under budget.Question, question, question. I often found auditors doing irrelevant work. Remember that the audit team is on sight at a huge cost. Their faffing is for your account. Micro-managing the auditors’ is essential!
• Prepare to defend yourself on all fronts. Auditors hate to write off fees and, unless you are on top of your game, you will pay for all their inefficiencies.

We all know that my client did mess up - his major error is that he had relied on a trusting relationship with the audit partner. For that reason alone he probably deserved to be fired.

But bear this in mind:

• Being in position of leadership can be more lonely than you think.You might be lucky enough to work for nice people. But stats seem to indicate otherwise.
• The corporate world is a dog-eat-dog environment. As much as you might find this repulsive and unpalatable, don't be naive - it's every man for himself, especially at the executive level.
• In the case at hand, my client’s boss did not support him because there were political issues between the shareholders which reflected very badly on him. It was his decision to move auditors and he was on the line for the huge increase in fees. He chose to use my client as the scapegoat.
• Walking into a mess is problematical. It looks challenging but you set yourself up as a target. As mentioned above, if there are political issues that you are unaware of, you will be used as a scapegoat. It is never easy to understand all the dynamics when you join as they are often hidden. Do some homework.
• Ensure that an audit committee is set up. This ensures that there are no personal agendas or cover ups.
• If you are the CFO and head of finance be sure you report to the CEO. Reporting to anyone else will leave you vulnerable and exposed.
• If you disagree with anything put it in writing. The risk of ruffling relationships’ is high but there is a far greater risk if you don't get the proper evidence of your objections.
• If you are in a family ownership space always remember that blood is thicker than water and nobody has any loyalty to you. The family always comes first.

I think it is also important to note that, due to the new audit regulations, the smaller and medium sized firms are facing new challenges around working papers adequacy and growing external independent reviews. The extra time needed to get the audit files up to standard will find a way into the audit fee.

Be prepared to tussle!   

(Originally published on July 13, 2016)

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Clive Kaplan is a prolific writer on LinkedIn PULSE. He has written over 200 articles on various topics from financial management and operations, to job search and confidence building. 

?Being a CA(SA) with over 25 years’ experience as an executive director in both listed and unlisted companies Clive brings some interesting perspectives to the field of management. Having been involved at Director/Board level, he offers a wealth of wisdom on both the people and business front.

Clive is the CEO of GREEN MIND CAPITAL (Pty) Ltd. The company focuses on assisting executives, especially emerging young CA's, maximise their potential and fast-track their careers.

Clive has been involved with coaching and self-development since 1994. He has a particular interest in Cognitive Awareness Technology (CAT) and has completed a number of advanced courses on the topic.

Clive's mix of years of practical executive experience coupled with his own personal self-development journey brings together a unique method of Transformation Coaching.

Clive is also a ORT Jet mentor and works closely with the More To Life program, both on a voluntary basis. He also works in SAICA's entrepreneurial development space.

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