Internal audit can help create a world class finance function. Dan Swanson explains how.
The finance function is a strategic one because it helps drive organisations to higher levels of performance by delivering information that enables key strategic decisions to be made. In addition to strategic planning, a well-run finance department supports sound financial management, organisational performance reporting, treasury-related activities, and financial reporting (and numerous other activities).
It tells you how many dollars are coming and going and as important where they’re coming from and going to. Without that information, people are driving blindfolded, and the organisation will have a difficult time building and then sustaining long-term value.
Finance, however, is more than just keeping track of the dollars; it’s also about ensuring that sources of funds are adequate and sustainable to fund the organisation’s operational requirements and allow the organisation to expand to meet the needs of its customers. The importance of the finance role is truly exploding – eg enterprise risk management, financial forecasting and management of the balance sheet, tax, mergers and acquisitions, IT investment management, encouraging adoption of new technologies, and on and on.
At the end of the day, internal audits of finance should not be focused strictly on financial reporting. The many significant activities within the finance function should be assessed regularly so that key opportunities for growth and organisational improvement can be identified and addressed in a timely manner.
Characteristics of a world-class finance organisation Where do you start? Build an understanding and agreement on what is the role and purpose of the finance function. Then obtain agreement on what the characteristics of a world-class finance function within your organisation should look like. Based on research published by the Government Accountability Office (GAO) ‘the finance department’ is best defined in terms of the significant business outcomes it can produce – outcomes such as improved business analysis, innovative solutions to business problems, reduced operating costs, increased capability to perform ad hoc analysis, and improved overall business performance.
Audit finance to improve organisational performance An audit of the finance department should determine whether or not the function’s current services are appropriate, whether organisational performance is regularly being optimised, whether management and finance are working together, and whether finance is helping the enterprise recognise and respond to new business opportunities as they arise.
There are many issues worth exploring in an audit of finance; I discuss four of the important areas below. The audit team will need to complete a comprehensive audit plan to determine the correct focus and priorities for an internal audit of the finance function.
(1) Strategy development Does the finance function help management define, and agree upon, strategy? Does it help with implementation of that strategy, including management’s recognition of, and response to, new and emerging business opportunities?
(2) Budgeting Do budgeting processes support the assignment of management accountability and monitoring of performance? The audit team should investigate whether the finance function helps top management with forward-looking analyses of the numbers and by forging strong ties between accounting information, budget formulation and capital investment, and strategic planning and implementation.
(3) Financial systems and processes Are there appropriate systems, policies, procedures, and guidelines relating to financial management? How successful is the finance department in meeting business needs?
Has the finance team done everything necessary to get a grip on the organisation’s preparedness and the organisation’s financial needs? While everyone is trying to forecast the next disaster to ‘handle’, in my view, process improvement and constantly strengthening the company’s key capabilities is a highly effective long-term approach to improving resilience and overall performance.
(4) Accounting Do the financial practices of the organisation meet generally accepted and industry-accepted financial management standards? Compliance with accounting and auditing standards is important, and an internal audit of finance should usually include a review of the organisation’s accounting policies and practices. Where departures in accounting policy or practice do arise – and sometimes an exception to common practice does make sense for a specific company – has that departure been explained and approved by the proper executives?
Organisations must proactively improve capabilities An internal audit of finance should foremost identify key improvement opportunities. The audit should confirm long-term finance needs (aka financial management and treasury management) are identified and being addressed. Equally important, the audit should make sure the finance department can track all the dollars floating around the company. Is cash management and recordkeeping strong? What can be improved?
Lastly, the audit should investigate who is driving organisational capability improvement efforts and assess whether those efforts are working well. Finance is not only about internal control over financial reporting, nor is it only about quarterly and annual reporting; while these activities are very important, they do not significantly affect long-term value creation.
A good finance function is about much more than that. A good audit of the finance function is about much more than that, too. In closing, the resources highlighted below provide numerous insights regarding world class financial management and every finance and audit professional should study them closely – is your finance function ‘world class’?
Good luck in making a difference!
Dan Swanson – president, Dan Swanson and Associates, Ltd
GAO Executive Guide: Creating Value Through World-class Financial Management A world-class finance organisation can best be defined in terms of the business outcomes it produces: outcomes such as improved business analysis, innovative solutions to business problems, reduced operating costs, increased capability to perform ad hoc analysis, and improved overall business performance.
Financial Insight: Challenges and Opportunities This joint report from ACCA and IMA suggests ways the finance function can improve current approaches to business partnering. It proposes nine pragmatic actions to improve partnering practices anchored in three core component parts: creating the mandate, fixing the information and deploying the talent.
Building your Financial Capabilities: a Guide for Growing Businesses Effective financial management is a crucial part of running a growing business. Whatever your business, raising finance, managing cash flow and keeping records are all essential, but in a growing business you want financial management that also does more – helping you to make informed decisions, assess new opportunities and evaluate the success of your business strategy.
The Rising Tide of Finance Challenges Most finance functions today are incredibly busy, with waves of work rolling in at a greater pace and frequency. The business activities they support are running red-hot amid improving, yet still volatile, marketplace conditions.
The results of the 2015 Finance Priorities Survey from the Financial Executives Research Foundation and Protiviti confirm that finance functions are beyond busy. The sheer number of priorities they are addressing is at an all-time high. What’s more, the number of finance skills and capabilities that respondents view to be higher priorities compared to last year’s results has risen dramatically.
As we reveal and discuss in our report, our findings suggest that finance executives and professionals are clear on what they’re trying to achieve through effective cash management, business intelligence and analysis, knowledge of changing tax and finance laws, and a renewed focus on ‘people’ skills.