Although many internal auditors still rely on spreadsheets, there is a wealth of new analytic and business intelligence (BI) software available.
Mostly, this technology is used by other departments, such as finance, and business intelligence vendors say they do not specifically target their solutions at auditors, generally because they sell to a finance directors.
However, analytic tools from vendors such as Coda Financials, Hyperion Solutions, Cognos, Business Objects, SAS Institute and Crystal Decisions can all be used to improve the quality of information available to auditors – and they are increasingly being used in audit.
Mike Malwitz, formerly a senior manager in the audit function of a Fortune-500 company, and now Hyperion’s senior product marketing manager, says his experience as an auditor has given him special insight into the needs of audit.
The first thing he checks at a company interested in his products is that there is a financial consolidation and reporting system in place, which can compile, analyse and report results to the board and shareholders.
“If the company was using some sort of spreadsheet process that is a red flag for us, because spreadsheets are inherently more subject to errors, more subject to omissions and inaccuracy,” he says.
He also argues that BI tools provide auditors with several further advantages over spreadsheets. Most important is that they structure data according to defined business rules and methodologies that are themselves auditable.
One Hyperion product, Enterprise, is often used by auditors as a consolidation and reporting tool, says Malwitz. It gathers information from various operating units and pulls out a range of reports, but also ties them back to the functions that generate the reports, so that users can access further information.
John Adams, a director in the BI division at Deloitte & Touche, says a major problem with using spreadsheets for consolidating data across a business group is that, despite underlying ERP systems often supporting spreadsheets through add-in software, data is still most often re-keyed for consolidation. But in the case of leading BI or consolidation software, which is often supplied and rolled out with ERP systems such as JD Edwards, SAP or Oracle, data is imported straight to the system and keying errors are eliminated.
Gains in integrity and efficiency aren’t the only benefits of BI for auditors, argues Adams. “You get greater flexibility in reporting via multi-dimensionality, and you can have multiple entity structures and greater control over the maintenance and up-keep of the application,” he says.
Furthermore, specialist BI tools can provide built-in hard and soft validations for data entry, and can support much larger data entity sets than spreadsheets, which can quickly become difficult to maintain. They can also provide features such as versioning, which creates an audit trail tracking journal entries and adjustments. “The BI system needs to track that information, it needs to present to the auditor the audit trail from the source of original input up through the consolidation,” says Malwitz.
He argues that, even in consolidation, BI systems extend beyond financial reporting into the realm of business performance management. This creates a much broader control mechanism, which can include balanced scorecards and key performance indicators. With this sort of system in place, auditors can be more confident in their work and can save time in the testing process, or when pulling samples and looking for trends, because the BI tools can be set up to look after the audit procedures.
Malwitz also says BI solutions can help internal auditors manage risk. They can analyse data from a transaction or balance perspective to identify unexpected spikes or valleys, or drill down to investigate further in a directed sampling exercise. They can then perform statistical sampling and extrapolate the results.
However, according to Charles le Grand, director of technology practices for the Institute of Internal Auditors, a survey published in the August 2002 issue of the institute’s Internal Auditor magazine, shows that spreadsheets are still the auditor’s most frequently used software tool, especially in the SME sector. Adams says this is due largely to the fact that only in recent years have the leading BI vendors produced packaged consolidation solutions priced for SMEs. Also, in spite of the benefits BI tools can bring, most auditors still prefer the approach they’re familiar with.
As a result, many BI vendors now use a spreadsheet-style front-end on their products, to give users a familiar format.
What’s more, spreadsheets are great for summarising, sorting and categorising relatively small quantities of data. They are also ideal for quickly analysing data extracted from large databases based on audit selection criteria.
However, BI tools can be used as a complementary tool to spreadsheets. Malwitz says some Hyperion customers use both, while others use BI instead of spreadsheets.
Coda Solutions, on the other hand, says it intends its solutions to be used as an alternative to spreadsheets, because BI is so much more powerful.
Coda’s international marketing director, David Turner, says that, unlike spreadsheets, BI tools can be set up to tell the FD, for example, when the debtors outstanding rise above a certain number, while the internal auditor can monitor trends throughout the business.
Turner says that many of Coda’s customers’ internal auditors are using its BI tools and are closely involved in the implementation process, even though the company does not target them specifically during its sales pitch. He cited one US customer, which runs private colleges, whose internal auditor attended a recent Coda user conference because he was heavily involved in the roll-out of these tools.
Turner lists a number of scenarios in which BI tools are helpful to internal auditors. Firstly, he says, BI can equip them to detect fraudulent dummy suppliers or dummy customers set up on the system. BI is useful in this case because it can compare addresses of suppliers, customers and employees to see if a customer and an employee have the same address.
BI can also help spot some manufacturing frauds. One common fraud is where rogue staff scrap perfectly okay products, only to retrieve them later and take them home. “BI tools, give you this view across the whole system, so you can monitor trends. That way you could look at write-offs by department, or by employee, to see if a pattern emerges,” he says.
Graham Walter, managing director of Cognos, believes that the greatest benefit of BI software is the insight it brings. “If you have a financial system that is running the business, you can sit BI tools on top of it to gain an understanding of what the numbers actually show,” he says. “You can perform analysis in ways that those systems themselves could not.”
The range of features of BI systems is growing steadily. For example, Cognos and Coda have a partnership whereby Cognos’ reporting and analysis products are being incorporated into Coda Intelligence, an analytic application that takes data from enterprise systems, transforms it into an analysis-friendly format, and loads it into a Coda datamart. Meanwhile, Coda Planning incorporates the Cognos Finance application, giving users the ability to revise budgets and forecasts on a monthly basis.
Adams says that, increasingly, finance departments need to focus on business decision support. And, although companies have benefited from their investment in ERP systems, there remains the challenge of delivering the relevant information to the right decision maker when he or she needs it. The developing BI tools, he suggests, are the way to do this.