Continuous Assurance 101 - PowerPoint PPT Presentation

About This Presentation
Title:

Continuous Assurance 101

Description:

Continuous Assurance 101 Miklos A. Vasarhelyi AT&T Laboratories Rutgers University Outline Electronization Continuous measurement & reporting Continuous assurance ... – PowerPoint PPT presentation

Number of Views:9
Avg rating:3.0/5.0
Slides: 42
Provided by: Mikl151
Learn more at: https://raw.rutgers.edu
Category:

less

Transcript and Presenter's Notes

Title: Continuous Assurance 101


1
Continuous Assurance 101
  • Miklos A. Vasarhelyi
  • ATT Laboratories
  • Rutgers University

2
Outline
  • Electronization
  • Continuous measurement reporting
  • Continuous assurance
  • Efforts and statutes
  • Concepts
  • CPAs
  • Enron ????
  • Conclusions

3
http//raw.rutgers.edu/continuousauditing
miklosv_at_yahoo.com
4
Electronization of Business
Purchasing
B2B Purchasing Open EDI Extranets Consortia
Manufacturing
Tracking
Sale
Payment
Pre-sale care
Inventory
Web-based Cash register Shopping carts Click
paths E-Catalog
VRS Auto Responder
Web-based Credit card E-cash Micropayments
E-Catalog
Delivery
Marketing
Individual targeting Spaming Virtual
communities Customer party lines
Bitable Non-bitable
Tracking
Advertising
Auditing
Accounting
Web advertising Customization Banners
E-care
Continuous Automatic Confirmation
Tech support Lead Follows Help desk
Continuous ERPSs New Paradigms
5
Key Financial processes being electronized
  • measurement (accounting),
  • control
  • Assurance
  • evolving revolution in corporate financial
    processes and the financial industry
  • several world class organizations are leading
    this effort

6
Continuous reporting
7
SEC roundtable of 4/4/2002
  • Priority no. 1 real-time reporting. Real-time
    reporting should take highestpriority. More
    frequent reporting of results will help solve the
    problem ofmanaged earnings because daily or
    weekly earnings will be harder to managethan
    quarterly earnings. SEC's proposal for faster
    reporting of some 8-Kitems is helpful, but it
    doesn't go far enough.

8
Short interval reporting
  • Ciscos virtual close
  • Real balances of certain accounts
  • Cash, accounts receivable, accounts payable,
    inventory
  • Estimates / allocations
  • Behavioral changes
  • End-of-period adjustments
  • Competitive fears
  • Scorecards (Bob Kaplan)

9
Increased frequency and scope of reporting
  • Obstacles are not technical
  • Internal vs external reporting
  • Litigation fears
  • Who needs continuous reporting?
  • Increased transparency
  • Qualitative, environmental, social, and other
    reporting
  • Multi-layered reporting (the FD rule)

10
Is Continuous Reporting Necessary for Continuous
Assurance?
  • continuous measurement is necessary, but the
    time from is contingent on the process
  • Batch process cycles limit the process
  • Companies measure a much wider set of variables
    to support a multitude of continuous processes

11
The Assurance Services (Eliott) Special Committee
proposed an evolution of services towards
real-time assurance
Real-time assurance on on-line
databases
Ultimately
Tomorrow
Today
12
Continuous Assurance
13
History
  • CPAS effort and embedded modules (ITF) 1987
  • AICPA /CICA monograph 1999
  • Continuous systrust 2001
  • Panel next ?????
  • Much academic interest since 1999 (3 symposia,
    this year in the UK)

14
Current Practice
  • HCA Healthcare
  • Several monitoring and auditing functions
  • Martin Marietta
  • Data driven risk model
  • Federal Reserve of New York
  • Network Monitoring

15
Why not?
  • my problems are not with transactions but with
    legal exposures and environmental effects
  • this is not auditing, it is supervision
  • this opens substantial data for the competition

16
A Dramatic Change in the Audit model
  • 1. The continuous assurance model has many
    clients
  • 2. The continuous assurance model has a different
    justification
  • 3. A new toolset
  • 4. The continuous assurance model is an instance
    of operational monitoring
  • 5. The continuous assurance model will turn the
    audit process into audit by exception
  • 6. The continuous assurance model covers a wider
    set of quantitative and qualitative non-financial
    data
  • 7. The continuous assurance model had different
    Independence considerations
  • 8. The continuous assurance opinion has some
    futurity implied in it

17
Pseudo report 1
  • We have examined the reliability and financial
    reports of ABC corporation and have been engaged
    on a continuous assurance engagement for the
    fiscal year of xxxx. We will monitor the
    organizations operations and strategic
    accomplishments using a wide set of analytics as
    described in http//www.ca.com/analytics and
    other analytics we deem appropriate and will
    report on an audit by exception basis when more
    than xx variance is found in operational and
    strategic standards or when we deem it
    appropriate. This exception report will be issued
    to all customers registered ( paying ) at
    http//www.ca.com/analytics/customers.

18
Pseudo report secondary assurance
  • We have been engaged on a continuous assurance
    engagement for the fiscal year of xxxx for the
    purpose of covenant monitoring. We will monitor
    the organizations covenants, using the ATT MC
    platform, as described in our agreement with bank
    XYZ using a specified set of covenant figures and
    wide set of analytics as described in
    http//www.ca.com/analytics and other analytics
    we deem appropriate and will report on an audit
    by exception basis when more covenants are
    violated by more than xx for a day or when we
    deem it appropriate. This exception report will
    be issued to bank XYZ immediately when the
    variance day is completed and to all customers
    registered ( paying ) at http//www.ca.com/analyti
    cs/customers.

19
CPAS concepts
  • metrics
  • Analytics / continuity equations
  • standards
  • of operation
  • of variance
  • others
  • alarms
  • measurement vs monitoring

20
CPAS concepts
  • The essence of monitoring and control is the
    comparison of a measured value (metric) with a
    model of behavior (standard)
  • Control of a process implies detecting variances
    and either accepting them or exerting action for
    change
  • Assurance is a meta-level for measurement,
    monitoring and control that detects anomalies in
    this process or provides re-enforcement of its
    proper performance

21
Monitoring, control and assurance
22
metrics
  • Are direct measurement of elements that measure
    corporate processes
  • Can be expressed in many types of units
  • A phone call has minutes, origination, dollars
    and modified dollars..
  • Metrics also work in aggregates (e.g. bottles,
    cases, liters, tons, etc)
  • Automated sensor substantially improve the value
    of a metrics
  • Metrics can be combined to higher level meaning
    metrics
  • Managers develop intuitive feeling for metrics

23
Analytics
  • Traditional analytics encompass time series and
    cross-sectional analytics
  • CA adds structural analytics provided by
    multivariate continuity equations
  • Some CA analytics include
  • Comparisons with constants
  • Relationships of variables
  • Daily, hourly, continuous reconciliations
  • Loose relationships (e.g 10 increase in
    advertising creates 3 increase in sales)

24
standards
  • Types
  • of operation
  • of variance
  • relationships
  • Others
  • Can be
  • empirically derived
  • model derived

Have to be realistic
25
Alarms
  • Multiple levels and purposes
  • A. Inform continuous assurers
  • B. Inform operations
  • C. Inform operations and auditors
  • D. Inform operations / auditors / top management
    / audit committee / regulators
  • E. Suspend the process

Level is an attribute of the alarm
26
Methods of data capture
  • measurement vs monitoring
  • Database queries
  • Capture of temporary datasets
  • Parsing of electronic reports
  • Direct process taps programmed into the
    transaction routes

27
Principles of Continuity Equations
  • Different stages of the product life life have
    different metrics
  • Continuity of processes creates relationships
    between different variables
  • Most processes have metrics being expressed in
    different units (volumes, dollars, units, etc)
  • There are intrinsic relationships between these
    values that can add substantively to basic
    analytical review
  • Standards must be developed to these
    relationships
  • The understanding of these relationships will
    avoid major process discontinuities or will
    identify them for scrutiny

28
Linking financial and non financial processes
analytically
29
CPAS effort
  • This methodology will change the nature of
    evidence, timing, procedures and effort
    involved in audit work.

30
CPAS effort (II)
  • The auditor will place an increased level of
    reliance on the evaluation of flow data (while
    accounting operations are being performed)
    instead of evidence from related activities (e.g.
    preparedness audits).
  • Audit work would be focused on audit by
    exception with the system gathering knowledge
    exceptions on a continuous basis.

31
CPAS OVERVIEW
System
System Operational Reports
Workstation
Operational Report
Operational Report
DF-level 2
Operational Report
DF-level 1
DF-level 1
DF-level 1
Filter
Alarm
DF-level 0
Data Flow Diagrams
Database
Reports
Analytics
Metrics
32
FlowFront - Interactive Flow Diagram Viewer -
ATT Bell Laboratories - Murray Hill, NJ
fer
04/01/89
Date
Set Date
Recalculating With Check.
Help
Text
Quit!
FlowFront Hierarchy
Billing System - Customer Billing Module
Customer Database
Extract Customer Accounts
Calculate Amount Due
Update Billing Info
1000
1000
Journal Files
Format Bill
998
988
Accounts Missing 10
2
Journal Files
Table
Process Errors
0
33
Flowchart Front End - C.J. Calabrese, F.B.
Halper, J.S. Lavin, T-W. Pao, M.A. Vasarhelyi,
C.S.Warth
11/27/89
Date
MESSAGE PROCESSING
Cant read sql 14
Cant read sql 15
ATT
LEC
reject held dropped
R
(excl. invalid IX)
0
invalid IX code
LUB and to other billers
6
Returns Transfers
89744
RCAM Biller
66449
12324
recycles
Interrogation/Deletion (to Billers)
Message Completion
Message Validation
238605
0
passed to message completion
Duplicates and Dropped Records
617
Business Biller
errors
errors
1106
68365
8
161
Message Investigation (MIU)
corrected errors LUB and to other billers
errors
0
34
FlowFront - Interactive Flow Diagram Viewer -
ATT Bell Laboratories - Murray Hill, NJ
fernsu
fer
04/01/89
Date
Set Date
Plot Request graph.level 1
RPC
Silver Springs
PE 60
Help
Text
Quit!
FlowFront Hierarchy
Billing System - Overview
S Graphics
Percent Of Accounts Successfully Billed
100
100
99
99
99
98
98
98
Tra
97
95
Bill Upda
85
AmtDue
67
0 20 40
60 80
100
Percent Billed
Pay
Overview
Trans Data
23
Inquiry
3/16 3/17 3/18 3/21 3/22
3/23 3/24 3/25 3/28 3/29
3/30 3/31 4/1
Pro
4/1/89
Mean 89.076923076923 StdDev
21.872591442494
Errors
35
New technologies need new thinking
  • Internetworking and extreme intrusion
  • Confirmatory extranets
  • Analytic webs and fourth and fifth party
    assurance
  • Intelligent transaction detection
  • Sniffers, exposure databases, pattern detectors,
    common fraud databases

36
The Enron debacle
  • Would CA have detected the problem?
  • Would have reduced it
  • If transparency is desired it can be obtained to
    the extreme
  • Other forms of third party monitoring can deal
    with management fraud and audit collusion
  • Are we willing to go that far?
  • Financial engineering and opacity together are a
    deadly mix

37
Monitoring and Control Business at ATT
Laboratories
38
Focus group objectives
  • Understand the business models that can emerge
    from the CA effort
  • Keeping independence of CA
  • Partnerships
  • Changing the audit paradigm
  • Bringing in new confidence on the process
  • Linking with network and IT assurance

39
Center for Continuous Auditing
  • A consortium of major Universities led by Texas
    AM
  • J. Don Warren Director
  • Will probably host this conference next year

40
Charter Board of CCA Research Fellows
The Center for Continuous Auditing An Alliance
of Arizona State University, Indiana University,
Rutgers University, Texas AM University and
University of Tennessee
  • Arizona State University
  • Kurt Pany, Paul Steinbart
  • Indiana University
  • Michael Groomer
  • Rutgers University
  • Miklos Vasarhelyi, Alex Kogan, Michael Alles
  • Texas AM University
  • James Flagg, Uday Murthy, Chris Wolfe
  • University of Tennessee
  • Jake Rose, Jon Woodroof

41
Center for Continuous Auditing (cont.)
  • in the process of finalizing the Advisory Board
  • The Honorable David Walker, USComptroller
    General,
  • Robert Herdman, SEC Chief Accountant
  • Jim Gerson, Chair, Auditing Standards Board
  • Barry Melancon, President of AICPA
  • Bob May, Dean, McCombs School of Business, The
    University of Texas
  • John Verver,Vice-President of ACL
  • Sander Wechsler, ISACA¬†

42
Conclusions
  • Need to re-think third party assurance wit focus
    on the client
  • Need to rethink the audit to use new technology
    (analytic, IT and TC)
  • More links are needed with XML derivative
    technologies
  • We need a new business model

43
(No Transcript)
Write a Comment
User Comments (0)
About PowerShow.com