Beyond auditing: expanding the conventional role in tough times.

today's economic problems represent an opportunity for auditors to expand their conventional approach. Auditors can provide additional services to help clients survive economic threats as well as increase benefits of the engagement.

Managing Strategy

Auditors can ascertain the changes that management is making in adapting to downward economic trends to determine whether they contribute to the company's value. This may include expansion delays; discontinuing selected divisions or operations; and changes in the development and marketing of new products.

They also review the development of contingency plans for meeting future risks of downward trends. In some cases, such as when there is a significant decrease in the customer base, the company may have to change its methods of doing business, partner with other companies or consider mergers and acquisitions. Auditors can provide valuable assistance by reviewing financial information used in valuing proposed mergers and acquisitions, along with providing advice regarding income tax effects of such changes.

Auditors can also review company attempts to correct weaknesses in production and operations, engineering and research, marketing; accounting and finance, and information technology. These weaknesses may be noted when management determines strengths arid weaknesses as part of its strategic plan.

An example is a company that has devoted little effort to marketing, while its competitors have instituted aggressive marketing campaigns. Auditors can review the company's marketing efforts through customer analyses to determine needs and wants, advertising and sales promotion, methods of distribution, and extent of marketing research.

Reducing Costs

Auditors also can help management cut costs by conducting a cost-benefit analysis of expenditures. A useful model for this is based on a review of actions (or decisions) made in specific functional areas, following individual processes. For example, the processes examined in purchasing would be to determine need, designate specifications, select a lease or buy alternative, select a vendor and make purchasing arrangements. See Figure 1 for examples of potential cost savings in specific functional areas.

Figure 1 Cost-Saving Measures

Functional  Potential Cost Savings
Area

Purchasing  * Buying less-expensive/less-complex or unneeded items

            * Considering the lease vs. buy selection

            * Obtaining more competitive bids

Personnel   * Reducing layers of supervision

            * Basing bonuses and promotions on performance

            * Hiring more part-time employees

            * Decreasing overtime through better workload scheduling

            * Renegotiating union agreements and health plan benefits

Marketing   * Using more online ads rather than expensive TV ads

            * Performing marketing in-house rather than outsourcing

            * Making cost/benefit analyses of prior marketing
              expenses

Operations  * Reducing inventory levels

            * Consolidating functions

            * Deferring research and development

Enhancing Revenue

Auditors also can assist management in efforts to maintain or increase revenue in a period of economic decline. For example, the effect of lowering prices on demand and sales must be determined, and new, or improved, products need to be considered to increase revenue. Bids on new projects may have to take into account providing more work for existing skilled employees, who might not be fully utilized, and rewards be given for performance and innovation.

The company may consider more marginal analysis of costs in pricing products. Close monitoring of competitors is necessary as other companies react to changes in the economy. The organization should emphasize providing additional service to customers and excellent products. More feedback can be obtained as to customer satisfaction.

Management may have to act more quickly in adjusting long-term strategy with downturns in the economy. There is the need for speed, flexibility and adaptability to change. In addition, to achieve additional opportunities and growth, management may have to assume more risk. Requirements for client credit may have to be eased, with close review of financial condition of customers. In addition, companies should determine which customers are less valuable to the organization, through measuring revenue and gross profit by each customer segment.

Herbert Witt, MBA, CPA, CIA, is an author and teaches a course in Financial Decision Making at the University of San Francisco. You can reach him at [e-mail].

BY HERBERT WITT, CPA