I wanted to draw your attention to an article that recently appeared on CFO.com about continuous auditing, mainly because the topic is one which is as misunderstood as it is trendy.

Continuous auditing is generally held to be an automated approach. Increasingly it is assumed to mean examining all data relevant to the audit being performed, rather than the historical norm of examining supposedly representative samples.

On top of this, the IIA defines it as “any method used to perform audit-related activities on a more continuous or continual basis.”

Rutgers University professor Miklos Vasarhelyi, calls it “an audit that happens immediately after or closely after a particular event.”

The article describes some examples of companies which have attempted to implement continuous auditing. The conclusion one reaches is that no one really audits continuously, but a few companies have managed to put in place some automatic testing using software like ACL that can reduce the work they have to perform on those transactions when they perform their “non-continuous” audits or highlight areas to investigate further.

This, I think, is good enough and valuable in its own right. Letting machines handle the menial tasks and freeing up audit staff to focus on bigger issues is a pattern as old as the industrial revolution.

A guest post by an intern in Internal Audit was recently featured on another accountant’s blog, I Want To Be A CA, and I was first alerted to it by Krupo’s post title bait. The post is not complimentary about internal audit, but the support for its thesis is so flimsy and based on purely anecdotal evidence that it’s impossible to take it seriously. It begins:

I work in internal audit of a large corporation in the Southwestern United States. That’s all I will reveal of my identity for obvious reasons.

The “obvious reasons” are that he’s about to trash every element of this opportunity he’s been given to work at a large corporation in the Southwest US (during a massive recession when people much more experienced than him are losing their jobs, and in one of the hardest hit parts of the country to boot) despite having only two years of university level accounting studies to his credit.

I’m reminded of a recent column by Maureen Dowd on the use of anonymity online:

In this infinite realm of truth-telling, many want to hide. Who are these people prepared to tell you what they think, but not who they are? … Pseudonyms have a noble history… But on the Internet, it’s often less about being constructive and more about being cowardly.

One of the best uses for constructive anonymity is that of the whistleblower. Most companies have set up whistleblower channels by now which allow employees at all levels to safely make public or report to an independent body abuses they have observed at work. The post in question is not an example of constructive anonymity.

With that out of the way:

So you ask yourself, why go into internal audit? Well I’ve been asking myself the same question. I’ve been here almost three months and still have yet to see any meaningfulness in this work. … Granted, without this deterrent could be rampant fraud and waste, etc, but that’s beside the point.

I thought the point was that audit is meaningless. So, factors which make audit worthwhile are beside it? I guess if you ignore the potential for rampant fraud and waste, the job would be basically meaningless. I think it’s safe to assume he’s been so busy mindlessly ticking and tying his POs that he wouldn’t see an opportunity to address waste or fraud if it presented itself.

And with that, I’m reminded of a recent post by Penelope Trunk on creativity:

It’s as misguided to divide the world into creative and non-creative jobs as it is to divide the world into creative and non-creative people. All jobs have opportunities for creativity. Some have more and some have less, but you usually get more opportunities to be creative by demonstrating that you are a creative problem solver over and over again.

IA jobs can be rewarding and meaningful, but oftentimes only as much as you make them. The key point is that the onus is on you to push your job into creative territory. Not at the expense of your required duties, but going above and beyond what’s expected of you. You have to want to make the work meaningful and strive to do so. Especially in an entry-level internship, as this is a great opportunity to show your superiors that you’re a top performer. If you ruffle too many feathers (and the problem here may indeed be the work environment he’s found himself in), you’re back in school before you know it anyway for third year.

Continuing on:

The thing you have to keep in mind with internal audit is that you are working with the same documents, same departments, and same procedures year after year with the rare addition or removal of a department.

This really depends on the type of organization you’re working for. There are companies that own various subsidiaries in related industries that will provide variety. I know in my position I see many different types of businesses that fall under the broad building materials category, including heavy industry, manufacturing and pure distribution/wholesale. Newly acquired companies are a source of variety as well, and there is a smorgasbord of accounting systems in use providing challenge and an opportunity to learn and develop.

Oh, and the other thing about internal audit is you don’t get to travel nearly as much as external auditors, because everything you’re auditing is in the same building. The hours are also a lot more manageable. Nobody here goes over 40 hours a week.

Again, depends on the company. I left public accounting because my current position offered the chance to travel extensively. Since starting the job last May, I’ve worked in Switzerland, Ireland, the US, and Canada. The lion’s share of traveling for me is to the US. I just got back from Phoenix (third time this year), and before that spent three weeks in the Seattle-Tacoma area. (Gorgeous country!)

As far as the hours go, when I’m back in town (which I am for the next three weeks!) it’s pretty accurate to say we work a solid 40 hours only. On weeks where I’m on the road, the days are longer (10 hours usually) and Monday mornings are brutal. Think getting up at 3:30am EDT for a flight and working till 6pm Pacific! The bottom line is that the work that needs to get done, gets done on time no matter how long it takes, and this is generally true no matter where you work.

If you don’t have much of an imagination, enjoy working by yourself a lot, don’t mind monotonous work, have attention to detail, enjoys following instructions, don’t mind doing work that seems pointless (in your mind), and wants a steady paycheck, then I’d say auditing is for you.

Yeah this pretty much sums up the whole snarky episode. I see the proposition of IA a bit differently:

If you have a creative mind, enjoy working in small groups and meeting tons of new people every week, love challenging work, can both devise and follow instructions (and occasionally throw them out the window), don’t mind work that is critically important to the continued growth of your organization, and want a healthy and steady paycheck, good benefits and job security, then I’d say auditing is for you.

Auditing 101: Never extrapolate from a sample of one across a large, heterogeneous population.

AccountancyAge is reporting that the UK and Ireland IIA’s chief executive Ian Peters recently made a statement on the contentious issue of having external auditors provide internal audit services:

Internal auditors answer to management and the non-executive directors… external audit reports to shareholders. Merging these two important functions has the potential to cause serious conflicts of interest and reduce the effectiveness of internal controls and the management of risk.

The statement was made in relation to the KPMG-Rentokil deal.

I think if the two parties gave us more details about the work performed around independence it was assuage many of the fears stakeholders are having.

KPMG has said they believe the provision of both functions “is perfectly feasible to do in the spirit and letter of the law.” If that’s so, how long before more of these arrangements are made by KPMG or other firms?

The Metropolitan Corporate Counsel, a publication dedicated to legal issues relevant to corporate lawyers, recently interviewed Alfredo Avila, Assistant General Counsel at Monsanto about how they approach FCPA compliance for acquisitions.

Monsanto recently acquired a US-based company with a Turkish subsidiary, and found during the due diligence the sub had made inappropriate payments to Turkish government officials. In 2005, Monsanto disclosed their own inappropriate payments made to Indonesian government officials and submitted to a three year monitoring program as a result, and Mr Avila talks about how their prior experience has affected policies going forward, including for this latest acquisition.

On the subject of codes of conduct:

Codes of conduct and compliance policies are important but are only the first step in assessing a compliance program. Monsanto believes that the biggest deterrent against unethical behavior is strong leadership.

I agree that codes of conduct are but the first step in ensuring compliance with the FCPA and other anti-corruption legislation. As an internal auditor, you want to assess whether the code of conduct has been read and signed by every relevant employee of the organization, and ensure that the code is complete and addresses issues covered by the FCPA. Typically new employees will receive the code of conduct when they join the company. Keeping the documentation to prove that everyone has agreed to the code is critical.

Assessing leadership is a much tougher job for an auditor. You will get a sense throughout your meetings and communications with senior management of their commitment to ethical business practices, and from there form an opinion. Of course if you already know there were past incidents of non-compliance, leadership is called into question and probably requires more substantive audit procedures to ensure compliance since the preceding events.

On the topic of embedding compliance into policies:

We had to reevaluate our policies for petty cash, travel and entertainment, inventory, delegation of authority and so forth from the perspective of the document trail. It made us formalize some practices into policies and reevaluate policies to make sure we captured enough detail so that an independent third party could find all his inquiries answered within the four corners of a document. That forced us to reconfigure policies and also reconfigure our expense recording so that our documentation captured more information. While this takes a little bit more time on the front end, it answers many more questions on the back end and contributes to creating a transparent culture.

Preparation and retention of documentation related to expenses is key to proving compliance with the FCPA. Any payments made to government officials, if they’re legitimate, will have appropriate evidence. I like the part at the end about creating a transparent culture because culture plays a huge role in establishing ethical traditions that can prevent situations like the ones experienced by Monsanto and their acquisition.

Read the full interview for more.

The news that KPMG has snapped up the audit of Rentokil Initial from rival PwC brings with it renewed concerns around the independence of firms providing additional services as well as opining on financial statements.

Under the arrangement KPMG would undertake all the statutory responsibilities associated with an external audit, while also ‘delving deeper’ and offering advice on internal audit issues.

Not only that, but the audit will cost 30% less than what PwC was charging. I wonder if the company will end up losing more than they’ve saved if the market punishes them for the perception of having a less independent opinion. The director of the Professional Oversight Board, the UK body responsible for monitoring the UK’s ethical standards, declined to state whether the deal would be investigated. For their part, KPMG says they are confident they can address the threats to their independence.

Some observers say the arrangement would not be a viable option for companies with a dual listing in the US, owing to strict independence guidelines or ‘bright lines’ set down by the Securities and Exchange Commission.

It may not help shave costs during a time of economic difficulty, but I firmly believe keeping internal audit service providers separate from external auditors is critical to preserving the independence required for a financial statement opinion and is just best practice in general. I would’ve thought 7 years after SOX we’d have this down pat.