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Readers comment on audit costs, asset-backed lending, and other topics of current interest.
CFO Readers, CFO Magazine
May 1, 2010
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It's about time we returned to treating the cost of audits as a necessary evil to be driven down as low as possible ("Auditing Your Auditor," April). Thank you for outlining several good approaches to help public companies achieve this much needed cost reduction.
The external audit creates little or no value in a well-run corporation. Given no foreseeable changes to the flawed audit foundation — auditors are controlled and paid by the firms they audit — maybe Securities and Exchange Commission chair Mary Schapiro should consider hiring employees with psychic abilities [given that enforcement would be] hard even if they were allowed an inside look — which they never are. Internal audit in those corporations does a much better job of managing the financial aspects of the business. However, if the goal of the corporation is to "cook the books," then the external audit can add a lot of value.
Finance Industry Blogger
OK, now that you have whipped the auditors, what are companies doing about lawyers' fees? Most are doing nothing. Yet, in many cases, they are paying lawyers far more than they pay the auditors, who are easy targets. Why should a company pay its law firm 100% of its standard billing rates, but insist that the auditors bill at 50% of their standard rates, which are much less than law-firm rates? The audit firms carry the most risk from lawsuits while the lawyers carry no risk for their work, but they are able to bill at standard rates.
Here we go again: history repeats itself. Fees go down, hourly rates rise, so audit hours or staff mix change significantly and quality most likely suffers. Unless, of course, as the article suggests, it's just a check-the-box commodity service.
How to Increase Audit Accuracy?
While the 7% "catch rate" [of auditors who were intentionally distracted as part of a study] is appalling and definitely sheds light on human nature, I find the fact that 66% of the other group failed to notice the manipulations even more distressing, although not unexpected ("Now You Don't See It," Topline, March).
I think this supports the anecdotal evidence I have garnered throughout my career that audits add very little value and are, in fact, very large value detractors. With fees increasing and time demands on clients also increasing, the audit community needs to find a new approach to business assurance that will increase the value of an audit for clients and financial-statement users.
I have just gone through the concurrent audit of four years; two audit firms were involved. I discovered that certain of the managers kept the staff closely focused on potential problem areas and, in fact, discovered some errors (which we quickly corrected). However, when the engagement manager was absent or did not completely understand the nature of the business or of the accounting transaction, the auditor was less effective (more easily persuaded).
We need audits, but we need auditors who are more experienced and less easily manipulated.
More Options for Asset-Backed Lending
In 2010, with liquidity severely constrained, dynamic discounting plays a crucial role for both buyers and suppliers ("Lien on Me," April). For the buyer, a significant return on capital can be gained by negotiating a discount for early payment, and for the supplier, much needed cash flow can be financed without the need for the banks.
Another receivables-based financing option that is available at much lower cost and with much less administrative overhead is supply-chain finance. With SCF, the financing rate is based on the credit rating of the buyer; if the supplier has an investment-grade buyer, the rate is usually about 2.0% to 3.5% APR, which translates into about 0.16% to 0.29% of invoice value for an invoice paid 30 days early. That is dramatically cheaper than other options. Also, there are no additional fees for collateral monitoring, field examinations, and so on.
With SCF, the buyer can access funds on demand over the Web without the administrative burdens associated with asset-backed lending, that is, reporting requirements, loss of negotiating flexibility with customers, and so on. And SCF advances 100% of the funds — there is no 20%+ holdback and there is no recourse back to the supplier. If the buyer does not pay, the supplier still gets to keep the funds.
Kohl's and Wal-Mart, among others, are now offering SCF to their suppliers, so it is increasingly becoming an available option to more companies, and one that suppliers might want to consider or recommend to customers who do not yet offer it.
Vice President, Working Capital Solutions
The Perils of Exposure
"Painful Conversions" (April) provided a great, quick overview of the perils of currency exposure.
One practical aspect that was not mentioned and that often drags us practitioners into heated debate is, at what level should one hedge the exposure? Contract level, business-unit or divisional level, or corporate level? All have their pros and cons. The main advantage of corporate-level hedging is that one hedges only net overall exposure, which saves cost. But instead you will find yourself XL-ing like mad to obtain the net after hedge individual contract performance.
Head of Commercial Management MEA & Russia
Orange Business Services
Further On Up the Road
Recessions come and recessions go, and inevitably things get better ("The Shape of Things to Come," March). The Fed punch bowl will be taken away in due time, too. Whether [the shape of the recovery] is a "V" or a check mark is not the real concern. Federal deficits and total U.S. debt have been a concern for some time, but have now reached critical mass.
There are no easy answers or quick fixes to this dilemma. The required painful choices will come only after a near default by the U.S. government, as too many promises have been made to all. Therein lies the trouble ahead.
Carlos L. Holt
Audit Manager, Office of Internal Audit
Metropolitan Government of Nashville & Davidson County