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Giving Finance Dept. the Audit It Deserves

Dan Swanson | July 1, 2008

Usually I write a column about how to audit some aspect of a whole enterprise—say, how the company manages risk, or how executives invest their IT dollars. That’s important. But we shouldn’t lose sight of the nuts and bolts: Companies are run by specific departments doing specific jobs, and they need auditing too. So we’re going to get back to our internal auditing roots this month, starting with the finance department.

The finance function is critical because it helps drive most organizations to higher levels of performance. A well-run finance department enables sound financial management, strategic planning, organizational performance reporting, treasury-related activities, and financial reporting (among many other things). It tells you how many dollars are coming and going and where they’re coming from and going to. Without that information, people are driving blindfolded, and the organization will have a difficult time sustaining long-term value.

The bottom line is that by focusing your audits only on financial reporting, significant activities within the finance function could be inappropriately or inadvertently ignored by executive management and the board. Key opportunities for growth and improvement could also be missed.

Characteristics of a World-Class Finance Organization

Where do you start? Obtain agreement on what the characteristics of a world-class finance function within your company should look like. Based on research published by the Government Accountability Office (GAO), “the finance department” can best be defined in terms of the business outcomes it produces—outcomes such as improved business analysis, innovative solutions to business problems, reduced operating costs, increase capability to perform ad-hoc analysis, and improved overall business performance.

To build a world-class finance function and help achieve better business outcomes, organizations need to define the finance function’s agenda—that is, get a consensus on finance’s mission, vision, core values, and goals and strategies—and craft a plan to get there.

The GAO has taken that high-level foundational effort even further, by outlining four broad goals and a total of 11 best practices that define a value-creating, customer-focused finance function that delivers real business results. They are:

(1) Make financial management an entity-wide priority.

  • Build a foundation of control and accountability;

  • Provide clear, strong executive leadership;

  • Use training to change the culture and engage line managers.

(2) Redefine the role of finance.

  • Assess the finance organization’s current role in meeting enterprise objectives;

  • Maximize the efficiency of day-to-day accounting activities;

  • Organize finance to add value.

(3) Provide meaningful information to decision makers.

  • Develop systems that support the partnership between finance and operations;

  • Re-engineer processes in conjunction with new technology;

  • Translate financial data into meaningful performance information, (e.g. develop exhibits and dashboards that clearly communicate financial performance and its impacts on the organization).

(4) Build a team that delivers results.

  • Develop a finance team with the right mix of skills and competencies;

  • Build a finance organization that attracts and retains talent.

While many finance functions have been focused almost entirely on financial reporting—and make no mistake, that’s a large and critical part of their job—a high-performance company needs to position the organization for the future, by building all the finance capabilities that are needed going forward.

Audit Finance to Improve Organizational Performance

Internal audit’s evaluation of the finance function can provide valuable feedback to the board and executive management. An audit of the finance department should determine whether or not the function’s current services are appropriate, whether performance is continuously being optimized, whether management and finance are working together, and whether finance is helping the company recognize and respond to new business opportunities as they arise.

There are many issues worth exploring in an audit of finance; I present a few of the important ones below. The audit team will need to complete a comprehensive audit plan to determine the correct focus and priorities for an internal audit of the finance function. Remember, the goal of an internal audit should be meeting the assurance needs of the board and executive management.

Does the finance function help management define, and agree upon, strategy? Does it help with implementation of that strategy, including management’s recognition of, and response to, new and emerging business opportunities? Auditors should investigate how accounting and operational performance data is being used to support budget formulation and strategic planning.

A high-performance company needs to position the organization for the future, by building all the finance capabilities that are needed going forward.

Do budgeting processes support the assignment of management accountability and monitoring of performance? The audit team should investigate whether the finance function helps top management with forward-looking analyses of the numbers and by forging strong ties between accounting information, budget formulation and capital investment, and strategic planning and implementation.

Are there appropriate systems, policies, procedures, and guidelines relating to financial management? How successful is the finance department in meeting business needs? The audit could explore how much line managers value good financial management and information in the execution of their various duties. Managers must constantly leverage and make the “best use” of the monies, staff, and other resources they have under their responsibilities; deferring financial decisions to strictly the folks in finance is not a good practice.

Has the finance team done everything necessary to get a grip on the organization’s financial needs? While everyone is trying to forecast the next disaster to “handle,” in my view, process improvement and constantly strengthening the company’s key capabilities is a vital long-term approach to improving resiliency and overall performance.

Are all the finance functions performing well? The audit team should ensure the organization’s functions have been defined: accounts payable, payroll, performance reporting, performance analysis, budgeting, and so forth. Confirm that assessment criteria are available to evaluate those groups’ performance during the audit. A client satisfaction survey or formal external benchmarking could also be useful in completing an audit assessment of overall functional performance. Consider performing a strategic Strengths-Weaknesses-Opportunities-Threats (“SWOT”) analysis based on a portfolio of historical and plausible future events. The outcome of a SWOT analysis will identify specific and actionable key opportunities for improvements and growth.

Do the financial practices of the organization meet generally accepted and industry-accepted financial management standards? Compliance with accounting and auditing standards is important, and an internal audit of finance should usually include a review of the organization’s accounting policies and practices. Where departures in accounting policy or practice do arise—and sometimes an exception to common practice does make sense for a specific company—has that departure been explained and approved by the proper managers?

Organizations Must Proactively Improve Capabilities

An internal audit of finance should foremost identify key improvement opportunities. The audit should confirm long-term finance needs (financial management, treasury management, or anything else) are identified and being addressed. Equally important, the audit should make sure the finance department can track all the dollars floating around the company. Is cash management and bookkeeping strong? What can be improved?

Lastly, the audit should investigate who is driving organizational capability improvement efforts and assess whether those efforts are working well. Finance is not only about internal control over financial reporting, nor is it only about quarterly and annual reporting; while these activities are important, they do not significantly affect long-term value creation. A good finance function is about much more than that. A good audit of the finance function is about much more than that, too.