The importance of strong controls and the value of good relationships with external auditors are key lessons that finance and accounting teams gleaned from the past year’s global pandemic turbulence.
For one thing, working remotely raised the likelihood of fraud, according to Julie Bell Lindsay, executive director of the Center for Audit Quality. “Working remotely can create new opportunities to commit fraud as internal controls and processes are not functioning normally, and it may be the first time that client personnel and their audit committees are working remotely.”
Auditor/client relationships also might be strained because of the unique new pressures that today’s external auditors are facing.
According to the American Institute of Certified Public Accountants (AICPA), “It may be impossible for auditors to comply with the auditing standards to issue audit reports in certain client situations.”
“Auditors should consider working with their clients on getting extensions to financial statement deadlines along with helping them obtain waivers or other contract modifications from financial institutions, lenders, and suppliers.”
Adjusting to COVID-Related Complications
Maintaining vigilance over heightened risks and keeping strong working relationships with external auditors are closely related. Historically, auditors depended on in-person interactions with clients to do their jobs.
Testing controls required regular onsite visits, and activities like observing the payroll accountant process timecards or inspecting plant inventory counts are essential to ensure internal control effectiveness.
Now, working under the new socially distanced rules of COVID, auditors are not able to perform this type of control testing and have had to make adjustments to their audit procedures. This most often includes an increase in substantive testing of transaction detail. For example, rather than testing 100 transactions, their sample size would increase to 1,000 transactions to provide more coverage over the account balance.
In some cases, COVID and its related business impacts created an increase of new, non-recurring items that might complicate the audit, and auditors need to be aware of this. These include one-time events such as layoffs and plant closings that must be accounted for accurately and disclosed in the financials.
Trust in Controls
Trust is the key to maintaining close auditor/client relationships—not just in people, but in the quality of the client’s finance and accounting controls.
BlackLine’s Senior Field Alliances Manager Katie Morris, who worked as an external auditor for EY before coming to BlackLine, notes that “trust in internal controls means trust in the client company’s accounting processes."
“This is where the value of cloud-based automation comes through clearly. Because all of the accounting activities are taking place in the cloud, accountants are able to transfer from office to home with few disruptions. And with integrated processes like BlackLine’s, supporting documentation is part of the unified platform, so it’s electronically available to auditors.”
For instance, Morris notes, PBC (Prepared by Client) and ITGC (IT General Controls) lists can be managed in real time, and like many other audit procedures, are visible to the company and the auditors.
“This real-time visibility into up-to-date, shared data is what separates cloud-based process automation from spreadsheet-based accounting,” she says.
Built-in Preventive Controls
Also valuable are embedded controls, such as BlackLine’s policies and procedures or segregation of duties functions, that are built into the processes themselves.
“Automated functions like these add the qualities of preventive controls into processes that are traditionally detective in nature, such as account reconciliations,” she says. “So that adds an extra measure of trust to the processes themselves.”
That trust will always be vital to company finance and accounting operations, even as some companies are now moving people back to their office locations.
“What we’ve learned is that the best businesses will always want to maintain the flexibility of having a remote workforce,” Morris says. “And those businesses know that in order to do that, they’ll want to maintain strong controls and foster the best working relationships possible with their external auditors.”
Read our latest issue of BlackLine Quarterly for more stories like this that can help you move through the current disruption and into a more productive future.