Moving to the Paperless Audit Engagement
Tuesday, August 14, 2001, 4:00-5:00 p.m. EDT
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The paperless environment has arrived in the world of accounting. Just a few short years ago, CPAs were completing workpapers and reconciliations by hand, on 4 and 13 column green bar paper. Now our clients’ systems and the business world in general are demanding our work be performed electronically. More importantly, CPAs are recognizing that significant gains in job realization can be achieved by using these electronic tools efficiently. Some of these gains have consistently exceeded a 15% increase in realization.
Duke Smaroff, one of the original users and developers of RSM McGladrey’s Paperless Audit, will share his insights on the efficiencies gained by the implementation and use of a Paperless Audit System. You will have a chance to ask Duke why public accounting firms should have a Paperless Audit System and how it can work within your specific firm. Some of the topics that will be covered include:
- Ability to review and work on audit/review files from remote locations.
- Reduced time spent compiling reconciliations leading to more efficient audits, better business understanding and potential for value-added services.
- The effect of a Paperless Engagement on your clients.
- Obstacles incurred in transitioning to a Paperless Environment.
- Best practice ideas on how to implement a Paperless Environment in your accounting firm.
August 14, 2001 Session Sponsored by HA&W Innovative Technologies, LLC
Session Moderator: I would like to welcome Duke Smaroff today to the AccountingWEB Workshop. I would also like to thank HA&W Innovative Technologies, Inc. for sponsoring this session on the paperless audit - visit them at http://www.haw-it.com/home/paperless.asp/m
Duke, one of the original users and developers of RSM McGladrey's Paperless Audit, will share his insights on the efficiencies gained by the implementation and use of a Paperless Audit System. You will have a chance to ask Duke why public accounting firms should have a Paperless Audit System and how it can work within your specific firm. Some of the topics that will be covered today include:
- The ability to review and work on audit/review files from remote locations.
- Reduced time spent compiling reconciliation's leading to more efficient audits, better business understanding and potential for value-added services.
- The effect of a Paperless Engagement on your clients.
- Obstacles incurred in transitioning to a Paperless Environment.
- Best practice ideas on how to implement a Paperless Environment in your accounting firm.
Duke G. Smaroff, CPA is Director of Business Development and Lead Trainer for RSM McGladrey's Advanced Practice Solutions and a manager at McGladrey & Pullen, LLP. As Director of Business Development for RSM McGladrey's Advanced Practice Solutions, a subscriber service through which independently-owned firms license the use of RSM McGladrey's electronic audit manuals and the Firm's paperless audit template, he helps develop and oversee the solutions practice including expanding the use of the audit tools and instructing new subscribers on how to use RSM McGladrey's electronic audit tools in Lotus Notes.
Session Moderator: Duke, welcome, the floor is yours!
Duke Smaroff: Thanks, Kelly! Welcome everybody and thanks for taking the time out of your busy schedules. Also, thanks to AccountingWEB for allowing me this opportunity to communicate with you. I hope that I can answer many of your questions today as to where the accounting world is going in terms of paperless auditing and how it might affect your firm.
It seems as though the number one question on everyone's mind is why should I go paperless? I promise you, at McGladrey and Pullen we didn't go paperless only to justify the cost of all the laptops we've bought our professionals' - we were looking for efficiencies that would increase our realization. We were also looking for ways to get information timelier to the actual users.
I'd say the three main points of a paperless system . meaning programs and workpapers are:
- Automatic updates of changes in programs and research tools as accounting pronouncements and task force findings are issued.
- Reduction in the time spent compiling data.
- Ability to review, make comments and ask/answer questions about workpapers and files remotely.
Just to expand on each of these briefly,
Automatic updates of audit programs and research tools are a necessity these days. The SEC is putting pressure on the accounting industry for more rules and regulations that are affecting the accounting of all businesses, public or not. As a result, new FASB's and SAS's are coming out at a record pace.
The Emerging Issues Task Force is constantly sending out directives on complicated accounting issues. And these issues are becoming increasingly complicated for the individual professional to understand. We can no longer wait until the newest printed version comes out next year . the correct information is needed quickly, in an easy to understand format, as soon as that information is available.
For example, at McGladrey & Pullen, LLP, we've set up a system so that as the new pronouncements are issued, changes are made on a master copy at our technical office and then we "replicate" or copy these changes down to copies of our research manuals, audit programs, etc. automatically.
So, within days after a new pronouncement or clarification, each of our professional staff has a copy of the new information on their own computers to be reviewed, printed out, etc. in the field, at home, wherever they can access their computers. By keeping our procedure manuals, audit programs, technical guidance and footnote examples in an electronic form, they can be updated instantaneously giving us the timely updates we need as professionals.
The number one way to increase realization in our profession is to reduce the amount of time our professionals spend compiling information. Auditors should audit while the client's accounting staff compiles information. It's okay if the client expects us to compile information, just as long as we are paid extra for it. Over the last 7 or 8 years, we've tried a number of ways to reduce our time spent compiling data, including automation of financial statements, specific workpaper request lists, change orders, etc. The efficiencies gained by the paperless audit have exceeded the combined gains of all of these tools. The primary reason for this increase is that by doing the files paperless, our procedural documentation, cross-referencing, analytics and explanations are in the file year after year. For example, we used to spend time every year answering our audit program steps with the same answers to the same questions and referencing workpapers in the same spot.
Now, since our audit program steps roll forward (except for the signoffs), that documentation is already complete, the step is already referenced. And because it's computerized, we've linked the applicable workpaper with the step. Imagine, the workpaper step says to "test the bank account reconciliation", we document the type of bank account and procedures performed on the individual audit step and then a little link takes us to where those steps were performed. This has really had a number of benefits, not only are we linking our procedures with the individual workpapers, but year after year, you'll find the same workpapers in the same spot, documented in the same way. As a result, more and more of the files will start to look like others. Uniformity of audit files has an ability to bring efficiencies on it's own, just by allowing reviewers to know where to look to get answers to their questions.
The paperless audit also helps put the compiling of data in the hands of the client. For example, one of the first clients I took paperless just gave me their usual excel files the first year; I audited and documented those files on the computer. When the second year rolled around, I told them I had some other spreadsheets, such as accounts receivable analytics, gross profit analysis, etc., and asked the client to complete this information for me this year. This led the client to complete the analysis and workpapers we always did because we had already set up the format for him. This way, not only did we not complete even one workpaper, but also the client completed them in the format I wanted.
The third big advantage of a paperless audit is the ability to review files, make comments and ask or answer questions about workpapers and audit files remotely. The overlying format of our paperless audit is that each individual has copy of the file on his or her own hard drive and then a "master copy" is maintained on the network server. As each individual works on the copy on their own computers, they continually update the "master copy" either over the network or individual phone lines. The updating process allows everyone to have the most current version on his or her individual laptop at all times.
By everyone having a version on their own computer, it also allows individuals to work on the engagement, even though they might not be in the same room, or even the same state.
For example, last year I spent two months traveling back and forth to Boston working on a large contractor, flying out every Monday morning and flying back every Thursday night. I'd actually review the files on the airplane, review sections and make comments on individual workpapers, even answer questions from my professional staff on issues they were encountering.
The ability to review files remotely doesn't only help reviewers who travel halfway across the country; it also helped me do my reviews more timely. Before, it seemed like when I was at the clients', I spent all my time buried in a conference room trying to get sections reviewed, even sections like cash, prepaids and other assets.
What I should have been doing was spending time with complex areas and discussing these items with the client. Now, because of the paperless system, if I have 30 minutes before meetings, or a spare hour before I go to sleep at night, I'll review the smaller sections of an audit. That way, when I do go out to the clients, I already have all the smaller sections reviewed and only spend my time discussing and reviewing the real "issue" areas. Overall, my reviews have gotten better and timelier! With all these advantages, including a consistent increase in realization often exceeding 10% to 15%, it's wonderment why all firms haven't gone paperless. Especially if a firm only sees a small improvement in their realization, say 5% of their audit and accounting revenues, it will more than cover the costs of a paperless product, including training time, etc.
The experience I have had is that people think going paperless is more complicated than it really is. Every time I finish a training session, individuals come up to me and say this is going to be easy, I thought it would be tougher. People think it will be tough because they think "paperless" and that means integrated systems, complicated programs, etc. However, in reality, all we really did was change the binder from a physical 3-ring binder to an electronic one.
Look at the workpapers you currently receive from your clients. Ninety percent of those workpapers are excel files where the client did the reconciliation; all we do is find a different way to store those files. Luckily, our storage unit (the paperless audit) comes with some benefits such as the ability to roll forward data and remote review abilities that relate into increases in realization.
Duke Smaroff: Some common questions I always hear include:
1. Are there any disadvantages to using a paperless audit process?
Well, not anymore! Let me explain: Because technology has been such an important part of the accounting industry for a number of years now, each CPA already has their own computer and is proficient in windows based programs, therefore the investment in technology and time is minimal. Also, to ensure the quality of our program, we have spent over five years developing and refining the paperless audit process to ensure it is a cost effective tool.
2. Our clients' are not very sophisticated with their technology; can we still gain efficiencies using the paperless audit.
Yes, the paperless audit does not require advanced computer systems or a high degree of computer integration. Instead, review the prior year audit file, if most of the workpapers are printed out of Excel and Word or similar programs, not completed on green-bar, your client is ready for paperless. Even if many workpapers are hand-written, tremendous efficiencies can be gained for both you and your client by taking the time to set up the reconciliation's in an electronic format in the first year. Once the format is completed, that reconciliation setup can be used every year and we find clients are receptive to completing analysis and reconciliation's using electronic spreadsheets once we give them a shell of what it should look like.
3. How are more complicated programs, such as general ledger software programs integrated with the paperless databases.
Our firm uses GoSystems general ledger software and it is completely integrated with the paperless database. The paperless database is linked to GoSystems allowing the database to take a "picture" of any report available in GoSystems. For other general ledger software, reports required for the audit file are just printed to an excel file and that excel file is integrated with the paperless database.
4. How quickly can our firm expect to see positive results from the paperless audit process? -
As with all new programs and processes, there is a learning curve associated with the paperless audit process. The results vary based on the technological savvy of the firm, the time of year in which the process is rolled out and the manner in which it is rolled out (ex: a pilot team vs. entire audit staff).
5. How quickly can our firm expect to see positive results from the paperless audit process? –
As a general rule, it takes one individual to do two or three jobs to be as efficient with a paperless file as a paper file. Bottom line efficiencies begin to materialize quickly after that and significant gains are made in the second year of the audit process as the roll forward process begins.
6. Can the paperless audit process be used for compilation or review engagements?
Yes, the paperless audit platform and electronic manuals are set up for use with a variety of engagements. It is especially efficient for subsequent years of review engagements. Typically, a review engagement consists of analytical review compared against prior years and industry standards. Because the paperless platform provides a roll forward feature, prior year data is continually rolled forward and compared with current year data.
7. What is the best way to implement the paperless audit process?
Implementation really depends on a couple of factors, primarily, the technological capabilities of the audit staff, the time of year of implementation and the type of clients being audited or reviewed. The two most common ways of implementation are: (1) All the engagements fitting the paperless audit process criteria or (2) A pilot program with key clients and personnel. No matter which way the process is implemented, it is important to have a product champion to minimize any learning curve. We can help you determine which implementation process is best suited for your firm.
Jennifer Ball: How many McGladrey offices are using the paperless audits at this point?
Duke Smaroff: Hi Jennifer, we have it started into all offices, some are 100% paperless, some are still implementing.
Louisa Wallick: How do you deal with peer review?
Duke Smaroff: No change - We have had a number of paperless audits go thru peer review, subpoenas, etc
Juan Mendoza: How about documents - are they just scanned into the file.
Duke Smaroff: Yes, but only sometimes. If it's more efficient, it makes sense, but I wouldn't do it for 40 receivable confirms.
Guy Miller: How do you coordinate audit programs with the excel/word workpapers.
Duke Smaroff: We have a small paper binder for rep letters, etc. Guy, each program is a document, which is doclinked to the workpaper.
David Mosley: Must an audit team carry a scanner around then?
Duke Smaroff: David, if it makes sense, we find not a lot is scanned in. Really only confirms only.
Duke Smaroff: Give me just a second to answer some of the other usual questions and I'll take some more.
Jennifer Ball: Are workpaper sign-offs password protected?
Duke Smaroff: Yes, each individual is given a separate ID and password
Session Moderator: Are there any questions? Please feel free to ask
Steve Conklin: Do field staff have the ability to replicate with each other without replicating to the server?
Duke Smaroff: Steve, yes, if have more than three people in the field, we use a field server which then replicates with the main version.
Mike McConnell: How does this work with non-profits, governmental, fund accounting, etc.?
Duke Smaroff: Mike, we have all of those programs in a paperless format.
Larry Siongco: What type of costs are involved in implementing it. Are you selling a program? How much?
Duke Smaroff: Larry, yes - it depends on the number of users, etc. I can anyone thru a demo of the product, I can be contacted at 866-326-6160.
Steve Conklin: Is the field server perhaps the lead person on that engagement?
Duke Smaroff: Steve, not sure I really understand your question. Everyone has a version on his or her computer and replicate with a main version on the office server.
Louisa Wallick: Does the program you sell have "standard" programs with pre-set links to workpaper shells, or do we create our own? How complicated is this?
Duke Smaroff: Good question! – We have standard programs designed by McGladrey and Pullen, LLP. The programs also can be modified to individual clients.
Steve Conklin: Does one engagement member's laptop act as the field server or does the team bring a server with them to the field?
Duke Smaroff: I got ya Steve, it has to be a separate computer, we use a bunch of old computers that we no longer used for anything else.
One of the other big inquiries always revolves around the client. When I took my first client paperless, it was part of our pilot program. I asked a long-time client to participate and their first question was "How does this affect me?" My answer was not much; in fact, I reduced their amount of work by not having any of the workpapers printed out. They just sent me the information on a disk; I saved them into our electronic binder and performed my work on the computer. As I've brought more clients into the paperless environment the past couple of years, bringing up a few small points the year before hand would make it go easier.
Larry Siongco: Do you require a minimum number of users from a firm who wants to purchase the program?
Duke Smaroff: No required minimum? We have a different number of packages and we can discuss what makes most sense for your firm.
Duke Smaroff: Back to our clients! Therefore, I suggest the following:
Inform clients that you are moving to a paperless environment. Clients are excited to be part of a new process, it reassures them that they are valued and respected.
Get information electronically. A majority of client prepared reconciliation's are already prepared in word processing and spreadsheet formats. Instead of receiving reconciliation's on paper, have the client copy these reconciliation's to a disk. Designate on the "workpaper request letter", which workpapers will be maintained in the audit file and should be prepared electronically.
Prepare spreadsheets and word processing reconciliation's for workpapers, which currently are done on paper. Preparing these workpapers electronically this year will ease the process by saving the client time and getting the auditor workpapers in a preferred format next year.
Document audit work electronically - traditionally, a majority of audit workpapers are reconciliation's prepared in a spreadsheet format, printed out by the client with tickmarks and explanations written by the auditor on the reconciliation. Documenting work performed on reconciliation will familiarize staff with working electronically as well as provide the foundation workpapers and documentation for the next year.
Save electronically documented workpapers in a designated client directory for transition in the next year. Providing the client previous year workpapers and reconciliation's in an electronic format will improve the client's efficiency in workpaper preparation. Providing the client with the electronic workpapers in a format you desire and are accustomed to will improve audit work documentation and reduce review time.
Duke Smaroff: Hopefully the above helps you understand the steps and limited complexity with moving to a paperless environment.
I'll be happy to take any more questions, but first if anyone needs a closer look or would like to have one-on-one demo, please contact me at 866-326-6160 or Duke_Smaroff@RSMI.com.
Duke Smaroff: The demos are done over a web conference straight from my office to yours!
Session Moderator: We are about out of time, are there any other questions?
Duke Smaroff: Any questions?
Meganm: You had indicated you don't scan many documents....how do you get away with not having those items in your workpaper file. Can you give examples of what you would not scan.
Duke Smaroff: Megan, looking at most of our client reconciliation's, they are already word and excel files - we just attach/embed those files into our client database. Any type of workpaper in particular?
Juan Mendoza: Sounds like your clients do a lot of work, unfortunately ours don't will we still benefit?
Duke Smaroff: Juan - #1 question of the day. I have a number of clients that before would not be good at doing reconciliation's. I found that if we did a template and gave it to them, they had a shell they could work from and didn't mind doing the work. Our realization increased significantly on those clients
Larry Siongco: Is this program compatible with other spreadsheet and word processing softwares?
Duke Smaroff: Larry, yes - all windows based programs, any in particular.
Kelly Hunter: Is this program that you are referring to McGladrey's Lotus Notes version or is it ePace!?
Duke Smaroff: Kelly, it's McGladrey's Lotus Notes. The other programs just didn't have the power that lotus notes has and couldn't handle our client loads. Therefore, we developed the program using Lotus Notes, even though our other tools are Microsoft.
Larry Siongco: Lotus, word perfect.
Duke Smaroff: Larry, yes, both.
Greg Elpers: Would it still be advantageous to be paperless if the audit teams are small and traveling is not an issue?
Duke Smaroff: Greg, Yes, primarily because of the rollforward process - also the ability to review sections from home or office. The biggest advantage is continued documentation and referencing.
Guy Miller: What software do you use for the audit programs, PPC, Miller, other?
Duke Smaroff: McGladrey and Pullen's audit programs. I say our is much, much better.
Juan Mendoza: Why is your product better than say PPC?
meganm: Why is it better?
Duke Smaroff: Primarily because of our risk-based audit programs, significantly higher materiality limits, lower sample sizes, etc. Megan, I think PPC has a good product. I won't say they don't, I'd be interested to compare their scopes and limits with ours. In addition, ours have real time updates. For example, we have an individual on the EITF board who can come back from a meeting, immediately update the manuals and get those changes to everyone's.
meganm: but we use the risk based audit programs from PPC.
Session Moderator: Is that working for your Meganm?
Session Moderator: Great!
Steve Conklin: How would I get your real time update if I use your product?
Duke Smaroff: Computer in the field the same day! Either you would set up your own server or we could host a server for you.
Ed Jolicoeur: I've seen both PPC's & McGladrey's paperless products. McGladrey's is considerably more functional with links, embedded files, etc. We went with McGladrey.
Duke Smaroff: Thanks Ed!
Session Moderator: We are about out of time, are there any other questions or comments before we wrap up?
Duke Smaroff: Please give me a call with any other questions or e-mail me at Duke_Smaroff@RSMI.com or at 866-326-6160.
Session Moderator: I would like to thank you all for joining us today. Great session Duke, we appreciate your time and effort.
Session Moderator: I would also like to thank our sponsor, HA&W Innovative Technologies, Inc. You can visit them at http://www.haw-it.com/home/paperless.asp/m to find out more about paperless audits.
Duke Smaroff: Thanks Kelly and everyone, appreciate everyone taking the time to join us today.
Duke G. Smaroff, CPA is Director of Business Development and Lead Trainer for RSM McGladrey’s Advanced Practice Solutions and a manager at McGladrey & Pullen, LLP.
As Director of Business Development for RSM McGladrey’s Advanced Practice Solutions, a subscriber service through which independently-owned firms license the use of RSM McGladrey’s electronic audit manuals and the Firm’s paperless audit template, he helps develop and oversee the solutions practice including expanding the use of the audit tools and instructing new subscribers on how to use RSM McGladrey’s electronic audit tools in Lotus Notes.
Before joining Advanced Practice Solutions, Duke spent over eight years in various McGladrey offices as a member of the audit staff. As a member of the audit staff, he was responsible for audit and consulting advice to clients in variety of industries. Duke continues to work with the Chicagoland audit staff and manages a reduced client load. Duke’s experience in a variety of fields, including manufacturing, construction, distribution, software development and finance has provided him with the background necessary to discuss and determine solutions to “real-world” issues during the training and support of Advanced Practice Solutions subscribers.
Duke has also been instrumental in developing McGladrey’s paperless audit product. Duke was part of an initial pilot group over four years ago, and has helped to develop the product from a ‘working’ point of view. Annually, Duke has been involved on a panel of individuals responsible for recommending improvements to the paperless audit process to gain continued efficiency solutions. He also has been responsible for training staff in efficient use of the paperless audit for various McGladrey offices and subscriber firms.
Education, Professional Memberships and Affiliations:
- Indiana University, Bachelor of Science in Business
- Certified Public Accounting with practicing license in Illinois and Indiana
- Member, American Institute of Certified Public Accountants
- Member, Illinois CPA Society