Ideas & Insights

Effective Communication Delivers Audit Transparency

Effective Communication Delivers Audit Transparency

The November 2017 issue of CSMFO Magazine featured an article, written by MGO’s Senior Assurance Partner Jim Godsey, focused on best practices for communication in the audit process. The full text is provided below.

Independence is the foundation of the audit profession. An organization undergoes an audit to have an independent third-party provide an objective opinion of its financial position and the results of operations. Parties that rely on the audit opinion to make or evaluate the results of financial operations – elected governing bodies, citizens, regulatory bodies, lenders and senior management – rely on the auditor’s access to complete and accurate information.

The key to this covenant of trust, between auditor, organization, and third-parties, is open, accurate communication. By enabling avenues of communication, a government organization can position itself to get maximal value from the audit process.

The following are a number of factors that contribute to, or hinder, effective communication before, during, and after the audit.

Creating an Ideal Environment for Effective Communication

The presence of qualified, experienced accounting professionals in appropriate roles within a government organization is the foundation for effective communication. These tested professionals –supported by a professional education program and with the appropriate years of institutional knowledge – can communicate technical details to the auditor, thereby limiting time and information otherwise lost in translation. Placing qualified professionals in positions of authority and supervision is integral to facilitating communications and leads to best practices throughout an organization.

There are a number of operational factors that support a positive communication environment. The presence of effective, documented, and monitored internal controls over financial reporting provides the auditor with a road map from which they can evaluate risk and design an effective and efficient audit approach. For example, an advanced Enterprise Resource Planning (ERP) solution allows for more precise and efficient data reconciliation through integrated controls and segregation of duties. Consistent practices throughout large, complex organizations allow the auditor to streamline documentation, communication, testing, and reporting of control weaknesses.

Factors that detract from effective communication include a lack of experience, structure, and consistency within an organization and high staff turn-over associated with economic and financial constraints. Resource-limited, unqualified, or undertrained staff lacking in historical knowledge of the organization can prove to be an impediment to communication. This is particularly the case when overt misdirection or misrepresentation is present as groups or individuals pursue special interests. In most of these instances, there is a notable lack of standardized procedures, and frequently, one person controls access to critical information.

Flow of Information Across an Organization

Effective preparation is the first step toward enabling and maintaining transparent, open, and timely communication during an audit. Before the engagement begins, an organization should make a concerted effort to have books closed, significant accounts reconciled and be in a position to inform the auditor of transaction recording weaknesses. This will save time and help ensure the accuracy of the auditor’s analysis.

Once the auditor is on-site, an organization’s staff can deliver significant value. Delegating authority to appropriate staff to discuss transactions, processes and disclosures provides the auditor with direct access to professionals who understand and perform these activities. Direct, in-person interactions between the auditor and staff provides an efficient communication path and engenders candid discussion.

Once the audit opinion has been released, it is of the utmost importance that an organization accurately and comprehensively communicate the auditor’s opinion to stakeholders and meet all requirements for continuing disclosures. Inaccurate, incomplete, or untimely representations effectively undermine the audit process. An important element of communications during times of fiscal distress is access to the media. Leaks and whistleblowers with incomplete or inaccurate information can create a hostile environment that should be avoided.

A significant factor that works against effective information flow is erecting barriers that prevent auditor access to information and require an auditor to go through a single (in many cases overwhelmed) point-of-contact. Finally, the need to delay the closing of the books, or closing the books multiple times, incomplete supporting information, and non-disclosure of undesirable conditions, will destabilize the auditor’s effectiveness and contest the appearance of transparency.

The Fundamentals of Transparent Internal Communication

When an audit must address, or reveals, fiscal distress it is all the more important to follow high-quality communication practices. There are many instances of local government entities avoiding further calamity by adopting dynamic supplemental communications externally. Examples in California include Orange County and the City of San Diego following the disclosure of their public financial issues. Unfortunately, there are many more examples of local governments that chose to delay or eliminate information from being provided to interested parties, resulting in the lack of transparency.

Frequent, consistent communication within an organization can help prevent fiscal distress from occurring in the first place. An organization can use fiscal planning (debt and capital management plans) to provide periodic reviews of financial health, which are not limited to the budgetary cycles. Additionally, monthly management reporting with department, agency, and controller oversight will assist in risk mitigation through timely identification of issues. Effecting these checks and balances gives an organization advance notice and provides the opportunity to stabilize an adverse situation and plan a long-term course correction.

The unfortunate truth is that some local governments have delayed addressing potentially significant situations and elected to provide “rose-colored” perspective to stakeholders further exacerbating the problem. Activities like these are hallmarks of an organization unable or unwilling to forecast financial difficulties on a timely basis. Reliance on annual financial statements to provide fiscal stewardship is a “too little, too-late” approach that virtually ensures an organization cannot course correct in time to avoid fiscal distress.

Transparency and Accuracy are Fundamental to Trust

Local governments reside in a unique operating and audit space subject to a complex array of oversight from elected officials, regulatory bodies and public accountability, while at the same time facing an ever-narrowing corridor of options to address fiscal constraints. Open communication, based on accuracy and transparency, is fundamental to completing the annual financial audit on a timely and effective basis.

About The Author

Jim Godsey is a Senior Assurance Partner for MGO LLP with over thirty years of experience in governmental auditing, training, accounting, and management services. Jim’s areas of expertise include state and local governmental auditing, forensic audits, fraud audits, management audits, and audits in compliance with the Single Audit Act. Jim is a frequent speaker, instructor and facilitator for the American Institute of Certified Public Accountants, the California Society of Certified Public Accountants, California Community Colleges and the National Association of JTPA Auditors.

 




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