The Graphics-Happy Auditor: A Story with Accompanying Fables

I mentioned in a previous post that some of the big auditing firms are now recommending that their clients start creating flow charts. These firms say that not only do the flow charts help regulators understand a company's internal financial controls much faster, but they help companies themselves understand these controls.

I thought it might be helpful to present an excerpt from a conversation I had with the auditor in question, Brianna Reams. She starts out her discussion with a story:

The Hart in the Ox Stall

An Aesop Fable for the Modern Age
Once there was a company that, twice a year, hosted a glittering award show in Manhattan. They invited key customers, served an elegant dinner, and spent a couple of hours recognizing some of the people who had made their company a success.

This went on for a decade, until one fateful day an auditor unearthed a document that showed that something was amiss. Buried deep in the company’s ledgers was evidence that for years it had incorrectly recognized the expense for these lavish events. The company had considered the costs as operating expenses. But the auditor correctly informed them that these were contra revenue expenses—money spent as an incentive for people to buy their product.

It seemed like a small mistake… probably innocent too, given how murky accounting regulations can be. But the repercussions were anything but small. It meant that the auditing company had to go back in and do a considerable amount of to reclassify the expenses.

Extra work by the auditors cost the company a tidy sum, and it meant that the company had to push out its filing date...which had its own dire consequences since delays like that send a bad signal to the market.

The One-Eyed Doe

And That's the Good News
But it could have been a lot worse. If the faulty expense recognition had had a bigger impact on the company’s financials, it might have had to restate its earning. That could cause the company to lose credibility, and might result in its stock getting slammed and put critical financial resources out of reach.

And these are only some of the consequences. Companies can lose revenue, or force them go back and restate when their revenue could be realized.

Hercules and the Waggoner

Flow Charts Can Be Very Expensive to Create... or Not
“I’m an auditor for a Big Four company,” says Reams. “Our job is to look at the financial statements of Fortune 500 companies for possible errors. More and more, we’re asking our clients to capture their internal controls as flow charts.”

Reams says that central to their ability to perform accurate audits is a clear understanding of the client’s processes for specific cycles—especially the financial reporting and revenue receivables processes.

“We’ll perform like a walkthrough and talk to the client to gain this understanding, and part of coming to that understanding is looking at a flowchart. We can create the flow chart. But hiring an external entity to create these flow charts can be a very expensive proposition. That’s why many clients are choosing to create their own.”

The Tortoise and the Hare

Make it Easy-Peasy for Your Auditors
Reams says it is very helpful to be able to look at the flow chart and see at a glance if the company’s internal processes make sense.

Yes, it is possible (and required) to capture these variations in text. But there is no need to limit yourself to what the regulations call for. The ultimate goal need not be to simply conform to the regs. It can be to do what is required—but to do it in a way that makes the process faster, less expensive, more transparent, and more reliable.

Will Flow Charts Become Mandatory Business Documents?

I was talking to a local marketing company CEO last week and got on the subject of flow charts. As it happened, the CEO had received a rare complaint from a client recently, which led the CEO to try ConceptDraw PRO for the first time.

Things Just Seems to Get More Complicated
Her decision to use PRO grew from her sense that the problem with the client really had to do with the fact that neither the client--nor her own staff--really understood the process behind the creation of marketing material. She said that at one time the materials had been so simple that there was no need to document the process. But that had changed as the market grew more complex.

And so very early one morning the CEO got up and opened ConceptDraw Pro for the first time. A few hours later, she had a flow chart that she now gives to all of her clients.

Not Just A Good Idea: It Could Become Law
Hearing her story reminded me of something another ConceptDraw PRO user told me. This person is an accountant with one of the Big Four accounting firms. She said that more and more often, the body that regulates auditors, the Public Company Accounting Oversight Board or PCAOB, is asking companies to provide it with a flow chart that explains the controls the company uses to manage its accounting processes.

So on one hand we have a company that's creating flow charts to help it communicate with clients and with itself. And then we have a government agency that now requests (and, reportedly, will soon require) public companies to create these kinds of flow charts.

Do Pictures and Images Count Yet?
This is interesting to me because it marks what I think is a shift in acceptance among business users of so-called "graphic documents" like flow charts and, yes, mind maps. You might well argue that there are all kinds of graphic documents used today, such as project management charts and slide shows. I guess what I find significant is that graphic documents are now being used to communicate non-technical subjects and that they are often the prime document, not supporting, document.

Once You Make It Clear, It's Clear
So... when was the last time you communicated using graphic or visual images to represent the information you want to share? Are parts of your business hard to explain to your clients? Would it help you to have a clear represention of a business process? If you bought ConceptDraw OFFICE and have never played around with ConceptDraw PRO, give it a try. There is a lot of clarity--and maybe even some peace of mind--to be found.

How Flowcharts Help Companies Save Money, Get Accurate Audits, and Satisfy the Government

The following is the first of a series of interviews with ConceptDraw users. While this blog tends to focus on ConceptDraw MINDMAP users, this interview features ConceptDraw PRO user Brianna Reams, an auditor for one of the Big 4 auditing firms.

In the interview, Reams describes how using ConceptDraw PRO to create flowcharts can help a company in three primary ways.

Hobie: Give us an example of the kinds of things a company might use a flow chart for.
Reams: Well, consider how a company recognizes revenue. For instance, when a software company sells a license, it can recognize that revenue immediately. If it also sells maintenance contracts, the revenue would have to be recognized over the contract period.

Or maybe you’re a custom manufacturer and your contracts say you get a third payment up front, a third when the project is half finished, and the final third on delivery. That involves a totally different kind of revenue recognition. Each process involves a unique set of internal controls.

Hobie: This sounds pretty complicated. How do companies usually capture this kind of information?
Reams: Usually with text. But as you say, these kinds of processes can be complicated, and wading through text can make it seem even more so. Representing these processes visually in a flowchart makes them easier to understand, and easier to catch mistakes.

Hobie: So what's in it for the company? Don't they pay auditors to figure all this stuff out?
Reams: Yes, that is what they pay for. And if it's hard for us to figure it out, they pay us more. But there's another rreason for companies to create flow charts--the Public Company Accounting Oversight Board.

The PCAOB is nonprofit corporation established by Congress to oversee the audits of public companies in order to protect the interests of investors. The board used to just want written descriptions of a company's internal financial controls. But now it's starting to ask for flowcharts--for the same reason we do. Visual representations just make it easier to understand complex processes.

Hobie: So the flowcharts help the auditors and satisfy the PCAOB. What else?
Reams: Well, one of the best reasons to create flowcharts is to make these internal control processes clear to the company itself. When key personnel understand the controls, there's less chance that the financials will be misrepresented. So flowcharts help everybody: the company, the auditors, and the regulators.

Hobie: What are the risks of not communicating these internal controls clearly?
Reams: Well, as I said, the company might have to pay more for the auditing agency's time. But a much more serious risk is that the company may have to reclassify its financial statement because of a misunderstanding between the company and the auditor.

Hobie: And what's the fallout if that happens?
Reams: It never looks good to have to make an adjustment to a financial statement. It can cause both the company and the auditor to lose credibility. And if the markets have already responded to your filing--and then you have to file again with new numbers...that can cause a company's stock to get slammed.

Hobie: Okay, so clearly, creating flow charts to document internal financial controls is something companies should seriously consider. So why do you recommend ConceptDraw Pro?
Reams: In cases where a company has not created flow charts, sometimes I have to go in and make them myself. I've found ConceptDraw to be easy to use, and it works on both PCs and MACs. And while there are lots of expensive flowcharting software applications available, ConceptDraw PRO is affordable and relatively easy to learn.

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