In 2009, Huron Consulting CEO resigns amid a 3 year financial restatement and the company’s stock price tumbles 57 percent. December 2008 the Madoff financial scandal breaks and hits the news. Events like these and many others, including HealthSouth earnings distortions, Chiquita Brands bribery scandal and even further back, Tyco and Enron have plagued the press over the past decade, and the only thing which has changed is we now have Sarbanes-Oxley.
After all of these lessons learned, how is the investor better protected? Have regulations instilled greater confidence in financial integrity? Why are we still auditing using the same methods of the past?
The realization is not much has changed. Audits are still performed after the fact and ultimately when errors and misstatements are uncovered, the investor pays the price.
It is interesting to note that with technology, we protect our homes, cars, packages, etc. with theft deterrents and real-time monitoring devices. Even our credit card transactions are monitored and quickly turned off in the case of suspicious activity. Why haven’t we applied these technologies and applications to our financial statements and accounting systems?
As a society we adapt and change to the risks around us. As investors we accept the fact that business has inherent risk and many accept the opinion of the auditor. The auditing profession has been around for over a century and has not really changed in the past 20 years, except to move from work papers to spreadsheets or electronic documents. Accounting firms who stand to profit the most from increased risks with higher audit fees perpetuate their existence. In addition, claiming their opinions and audits are not responsible for detecting fraud.
The business environment has changed but the auditing profession has not kept pace. Companies have been stretched to reduce costs and improve efficiencies while increasing quality and reliability to stay competitive. Now it is the accounting and auditing professions turn. SAGIN has implemented continuous auditing/monitoring services for clients which we believe is the future of protecting investors and stakeholders of financial information with greater reliability and integrity at a lower cost. In its most simplistic form, monitoring centers can be electronically linked into a client’s general ledger, operations, security, human resource systems, etc. and continuously monitor transactions flagging those for investigation based upon a risk model. This practice is nothing new and debated for over a decade by academics and auditing professionals. The argument stems from the position that this practice is not auditing and merely monitoring, which should be the responsibility of the company’s management.
SAGIN’s position is that monitoring if more effective at preventing errors and misstatements as well as detecting potential fraud and provides greater financial integrity. Auditing is an “after the fact” based process and investigation. Continuous auditing/monitoring does result in post investigations/audits; however, these are typically performed real-time. Traditional auditing does discover errors or misstatements, well after quarterly or annual financial statements have been issued. By this time, the damage has already been done, and the investor is left with a plummeting stock price.
Continuous auditing is a way to drive efficiency and effectiveness, while increasing the level of accountability and integrity and driving down the cost of compliance.
When continuous auditing methods are applied across both financial and operational systems, greater integrity can be achieved at analyzing trends. In one example, a $2 billion privately held global distributor of restaurant supplies compared new vendor accounts with spending trends. After monitoring shipping container usage with a new logistics vendor, they were able to identify large increasing in container rental fees which were fraudulent and unsubstantiated. Despite the internal controls of invoice approval and payment controls the continuous auditing was able to isolate, investigate and identify the fraudulent activity. This approach was stronger than the internal controls which passed control testing.
Continuous auditing is intended to detect errors not fraud. However, through the approach of monitoring trends across systems the methodology has identified fraud. Our approach does not replace an annual independent audit, however, if continuous auditing methods are applied it should significantly reduce the scope and cost of the audit to those transactions which are a basis of judgement and accounting rules.
To learn more about SAGIN’s approach to continuous auditing/monitoring contact us at: email@example.com