Applying JIT Manufacturing Concepts to Improve the Audit Process By Alan W. Anderson, CPA President, ACCOUNT-ability Plus
hard to believe that 10% of the 21st century is behind us. Perceived time passes quickly, but when one considers how the world has changed since the industrial revolution and that it’s only been 100 years since the concept of assembly line mass production of automobiles occurred, we know that so much has been accomplished! Cut that time in half to 50 years ago and consider the impact on our daily lives of the advent of the information age and computer technology. The convergence of advances in technology, an educated work force, globalization of the marketplace, and management philosophies that recognize the value of input from production line personnel, have vastly improved manufacturing processes. So much so, it now seems like anything is possible. This convergence spawned a new concept, originating in the early 80’s, known as “just in time (JIT).” This inventory management system, designed to improve a cash flow by reducing in-process inventory and associated carrying costs, is now well entrenched in manufacturing. JIT requires well-coordinated manufacturing steps and timely actions throughout the entire process. Applying JIT to the Audit Process The audit process is also a series of sequential steps that can be closely compared to a manufacturing process, generally following four basic steps to get the “product” to the customer in a coordinated and efficient manner. Those steps are: Design Build Inspect Deliver
The Kansas State Capitol - a “Work in Progress” for More than 100 Years: The tallest free-standing tower crane in North America is currently passing 340 feet above the Ad Astra statue on top of the Kansas State Capitol dome. Assembly of the Comansa 21 LC 400 tower crane was completed last month by J.E. Dunn construction. The exterior masonry restoration is a four-year project began in early 2008. For more information on the renovation of the Kansas State Capitol, go to http://www.kshs.org/places/capitol/renovation/overview.htm. (Photo by Mary MacBain, September 2010)
© Copyright 2010 Alan W. Anderson, used with permission.
In today’s audit world, however, “just in time auditing” has a different meaning. There is generally a tremendous amount of starting and stopping with the audit team able to deliver the final audit to the client “just in time.” With a sign of relief, the audit team says, “we finally got that audit out the door just in time for the board meeting,” and quickly move to the next “just in time” audit. Ironically, this is the exact opposite of the well-coordinated JIT manufacturing process. Let’s take a look at how we can apply these basic manufacturing concepts to the audit process to achieve a JIT audit that mirrors JIT in manufacturing. The end result—improved client service and a more efficient audit.
Design Take the “SALY” out of Scheduling and Planning Scheduling and planning, or the “design” phase, is an understandable concept that is difficult to deploy. Although recognized as equally important to all steps in the process, rather than take a fresh approach to the client’s current situation, the audit team unfortunately most often applies the same audit steps and same fieldwork timeframe as last year (same as last year-SALY). Rather than schedule the entire process from beginning to end to most efficiently meet expected delivery date (JIT), most audit teams schedule only the dates for audit fieldwork. To correct this common situation, consider these two questions when scheduling and planning your next audit:
Do you schedule planning and sufficient time to wrap up the audit to meet client expectations?
Does the team establish a final delivery date target with the client?
Is planning placed on the schedule but not completed because “some other client issue came up?” In addition to not treating scheduling and planning as equally important to other steps in the process, many firms don’t treat planning with equal priority to the scheduling of fieldwork. Planning becomes “when you have time.” Furthermore, the client is rarely engaged in the process, other than a quick call or email to confirm fieldwork start date. It is essential to actively engage the client in planning process to gain their agreement and understanding of their responsibilities to the outcome and to ensure that the auditor has a clear understanding of client expectations. Critical to scheduling is the client’s expectation of the final report delivery date. Without this, it is impossible for the team to put into action a plan to meet a delivery target. Establishing a delivery date that is jointly agreed to with the client serves many purposes.
First, a delivery date agreed to during planning makes it easier for the audit team to plan an audit so that audit procedures are completed to meet this client expectation. Second, the audit team can prepare an appropriate schedule and effectively communicate client responsibilities that ensure supporting documents and schedules are provided in a timeline that allows the auditors to meet client expectations.
Build Follow the Plan and Schedule and Maintain Momentum to Complete the Fieldwork We “build” during the fieldwork stage of an audit. JIT in the manufacturing process requires a constantly monitored, well thought out production flow designed to minimize downtime and to maximize throughput. The production line halts when the manufacturer runs out of raw materials. The audit stops when the auditor runs out of schedules and supporting documentation prepared by the client. The audit team should complete fieldwork, including drafts of the financial statements, with minimal downtime. All too often, however, there is no fieldwork process plan beyond scheduled dates of fieldwork with only the “hope” that documentation is available and most of the work can be completed in time to start another audit’s fieldwork the following week. Without a well-defined fieldwork process plan and a client engaged in this process, the team will audit only schedules and supporting documentation available (i.e. raw materials), and those available are usually the easiest, less risky audit areas. Downtime begins and, at times, the team halts production altogether and they leave the field. Generally, open items in the most difficult audit areas are left behind, and there is not a draft of the financial statements. The audit team loses its momentum and, more importantly, the thought process and client engagement. The audit team is left to complete the audit in a wrap up mode, which, unfortunately, is not scheduled.
Inspect Strive for Quality Assurance Rather Than Quality Control Manufacturers recognize that customers demand products that work. Inherent in any manufacturing process is inspection, and manufacturers realized long ago that inspection at the end of the line (quality control) created rework and waste. Inspection throughout the process (quality assurance) identifies defects at the earliest possible moment to minimize waste and rework. The purpose of the review stage in the audit is to ensure that professional standards have been met and that the audit is of high quality.
Unfortunately, the audit review process is most often performed at the end of the audit after the team has left the field, with the tendency to create rework and
Unfortunately, the audit review process is most often performed at the end of the audit after the team has left the field, with the tendency to create rework and waste (i.e. time). A continuous review process throughout the course of the audit provides a culture of immediate feedback and eliminates the waste and rework when waiting to review fieldwork at the end.
Delivery Make it On Time and As Expected In the end, the goal of the manufacturer is to deliver a high quality product to the customer at the time the customer expected and at a fair price. This goal is the same for the audit--to deliver high quality service to the client at a fair price. Throughout the audit, consider the client expectations to receive 100% of the services (for example; management letters and tax returns) as outlined and on time.
A first in a Series The KSCPA is excited to announce that Al Anderson is committed to helping the Society enhance the quality of the Accounting & Auditing (A&A) professional development and, therefore, the quality of our members’ A&A services. This article is the first of a series of 12 articles to be published over the next year. We asked Al to create articles that will stand the test of time and at the same time create a vision for how CPAs can stay relevant by adding value to their clients and organizations they serve. You can look forward to the following topics: “Audit Planning is a 2-way Street, both the Auditor and the Company Need to be Involved” “Understanding Audit Risk and Discussing Them with Your client”
With a well-honed audit schedule and plan, build, inspection, and delivery, the auditor’s services can be more than the delivery of audit report, exceeding the client’s expectations.
“Setting your Staff up for Success for the Audit”
“Fieldwork Complete…Is the Audit Complete”
I hope this article gives new meaning to the words “just in time,” and eliminates “it’s about time.” If the audit team reviews their processes and relates them to the manufacturing stages and applies JIT principles, positive steps can be taken to eliminate wasted time and to improve the quality of the service delivered to the client.
“Evolving Risk Landscape and Its Impact on the Audit Opinion:
© Copyright 2010 Alan W. Anderson, used with permission.
“The Characteristics of an Auditor”
Alan W. Anderson - Bio Al has over 25 years of experience in the accounting profession. After working primarily as a partner and National Director of Audit in the firm of McGladrey and Pullen, LLP and with the American Institute of CPAs as Senior Vice President of Member and Public Interest, Al founded ACCOUNT-ability Plus headquartered in Minneapolis. Prior to starting his new company, Al lead the firm of LarsonAllen, LLP in coordinating accounting and assurance services across industry groups as the Managing Principal of Accounting & Assurance Services. As President of ACCOUNT-ability Plus, Al is building a company to address the educational needs of auditors and to help push the vision of those he teaches to exceed client expectations by providing relevant services and meaningful information using real-time methodology. Al’s experience in the world of auditing reaches far and wide. This includes helping to standardize the global audit approach of McGladrey and Pullen, overseeing the AICPA’s technical audit and accounting standards, including self-regulation and the CPA examination and implementing paperless solutions. Al served as Chair of the AICPA Assurance Services Executive Committee for 6 years and continues to lead task forces of the Committee.
“The Pros and Cons of Email Use During an Audit” “Technology: A Blessing or a Curse During the Audit”
“Total Client Service: Did you deliver all of Your Services, or Just the Audit?” “De-commoditizing the Audit—A Pipe Dream?” “What Brings Value to the Audit? Value-Based Audits?”
“The Goal of the Audit” Each article will be supplemented with a video webcast or podcast produced and delivered by the KSCPA. Watch your e-mail for more information on how to register or call 785.272.4366. Al will also be providing A&A courses in our PD catalog, speaking at conferences, and is available for in-firm training, including a new offering “Reality Based Learning” (see next page). Our member’s appetite for information continues to increase and the methods by which this information is delivered are changing. The KSCPA is embracing this adaptation by establishing professional development programs that address the education demands with a variety of delivery mechanisms. We are in the process of a “listening tour” (see professional development update next page) to ascertain what our members need to maintain their state of the art. When done, we will create programs that deliver the information as a member benefit or as professional development events. STAY TUNED …
Professional Development Update
KSCPA Reality Based Learning
The KSCPA professional development program has been the leading activity of the Society for the past 35 years.
Presented by Alan W. Anderson, CPA
Times are changing, however, and the KSCPA is working to embrace these changes and continue to be the preferred provider of CPE and professional development for the membership. There is an increased diversity of our member organizations, many of whom now provide “in-firm” education or attend webinars and other varied methods of education delivery that are now available. There is increased competition among CPE providers, so our members have choices. The strategic plan of the KSCPA, as outlined by the Board of Directors at the Board Retreat in July, continues to identify “Enhance Professional Development” as one of the “Big Rocks.” This task force, championed by Michelle Schneider, met in September at the KSCPA office and by conference call. Members of the task force who met at the KSCPA offices are Cheryl Hayward, Tom Sewell, Chet Buchman, and Gary Boomer. Mindi Ormiston and Melissa Goetz attended via conference call. Susan Somers, Executive Director of the KSBOA attended to update the task force on the changes to the CPE regulations and to clarify what does and what does not qualify for CPE at the KSBOA. KSCPA team members were also present.
We are Listening … In order to meet the needs of our members for quality topics and exceptional speakers, we are conducting a “listening tour” tour throughout Kansas. We’ve been to the Metro Chapter meeting (9/15), and have the Central (10/27), Southwest (11/2), Northeast Chapter (11/3) meetings scheduled. At the Chapter meetings, we are asking participants to take 5 minutes in round tables to provide input and then have a table “leader” report their ideas to the group. In Wichita on 10/27, we are holding a “free lunch” where Matt List, Champion of the “Membership Growth” “Big Rock,” Mary MacBain, and Al Anderson will gain input on both membership growth and professional development. To register for this event, click here: http://www.kscpa.org/conteddetail.cfm?Course_ID=269 Our “listening tour” will help us to develop our courses beginning in January 2011. We are planning to expand our conference lineup, so watch our “Mark Your Calendars” on the website and checkout our professional development schedule at: http://www.kscpa.org/conted.cfm Thank you to everyone for supporting our professional development programs.
Reality Based Learning (RBL) is a learning environment that utilizes “live” data and/or information from a client of the participant. In contrast to the traditional learning environment which tends to be inflexible and is standardized for repetition to a high volume of participants, RBL is a free-flowing and flexible approach with very clear desired outcomes for materials to be covered. This makes RBL simple to understand but difficult to deploy except by an experienced practitioner who also has a high-level of understanding of the practical applications of audit standards, practices, and procedures. Although the traditional approach is designed to provide a positive learning experience for the participant that can be applied in the real-life situation, the standardized and structured delivery approach and material limits the ability to achieve this goal. In the end, the participant usually has a difficult time relating the materials presented to his or her real-life situation. In addition, the traditional approach may appear to achieve lower cost and easy CPE hours. Unfortunately, if learning outcomes are not achieved, the participant may gain hours without increasing his or her expertise. RBL is a way to enhance not only the learning experience, but also the retention of the concepts presented. When the participant gains the understanding on a “live” client, there is the expectation that the work performed on the client is real and useful to the engagement. The participant has a vested interest in listening, asking clarifying questions, and learning. Note: In addition to RBL, Al is developing a unique program for the KSCPA entitled “Operational Excellence: How to Effectively and Efficiently Implement Audit Standards on Smaller Audit Clients”
Interested in learning more about RBL and other professional development programs offered by the KSCPA? In addition to the series of articles, webcasts, webinars, podcasts, courses, in-firm training, reality based learning, the KSCPA is developing unique professional development programs to meet the needs of our members in the area of taxation and governmental / nonprofit accounting & auditing. Courses designed specifically for business, industry, government, and education are being scheduled, and conferences meeting the needs of the membership in general, including leadership programs, are scheduled for 2011. For more information about our programs or to provide input as to how we can create excellent programs for our members, please contact Linda or Mary at the KSCPA office, 785.272.4366.