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Paperless Audits Weigh In

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By Michael G. Stevens

For all of their involvement with technology, many accountants still haven’t fully mined its potential. One example of this is the way that they still rely on paper files in their audit, compilation, and review practices. This is beginning to change, however, due to the moxie of a few firms.

"Paperless practice is a trend that many firms will be going to over the next year through about five to six years out," opines Dan Simms, senior partner with Habif, Arogeti & Wynne in Atlanta, which has been paperless for over four years. "Everyone is used to what they know, but the biggest hurdle is getting the partners comfortable with the new direction of technology and making sure they’re on board," says Simms. He believes that generally, the staff is pretty easy to sell because they like using new technology and trying new things.

Partner Insights

Catherine Parente, partner in Carlin, Charron & Rosen, based in Worcester, Mass., agrees paperless technology is an increasing trend with larger firms but is not as common yet with smaller firms. "We’re a member of the Leading Edge Alliance of firms with about 40 U.S. members. Many of the firms that are larger firms, probably over 100, have gone to ePace (now ProSystem fx Engagement) or Caseware as a solution over the last year or two," says Parente.

"We’re continuing to see strong demand for paperless engagement products, particularly paperless audit products. We have over 5,000 users of our Engagement Manager product now. We did a survey in November 2001 that indicated that over the following three years, more than 8,000 firms would be adopting a paperless audit engagement solution.

"We’re seeing strong movement towards that. It continues to be a strong, emerging market," notes Scott Spradling, director of product development with PPC, Inc., a Thomson business. In addition to the basic software products that enable paperless auditing, PPC has introduced a series of e-Workpapers of Excel-based templates that "allow you to create work papers on the fly, link them into your trial balance database and store them in its Engagement Manager product as well," says Spradling.

Getting Going

While some firms may take a piecemeal approach, Simms’s firm’s objective was to go completely digital. "Most organizations don’t take a holistic approach to technology. It has to be driven holistically and from the practice management side. Everything an organization is going to do should be driven towards increasing profits," notes Simms.

Security Concerns

"From the standpoint of hackers, theft identification, and also disaster recovery, you need systems in place to not lose data. Our servers have uninterrupted power supply protection to provide enough time to allow someone to bring down the servers," says Dan Simms, senior partner with Habif, Arogeti & Wynne in Atlanta. He indicates that his firm has a storage area in network fully backed up real time to an off-site location. As documents are being loaded into the system, they are being replicated to an off-site storage area. "We also back up everything on tape each night and that’s sent off site. We have a contract with a company so if we lost everything in our building, we could have our systems back up within 24 hours," explains Simms.

He adds that problems a firm will solve as it goes digital are probably problems that should have been resolved years ago. Also, if a firm is digital, you shouldn’t lose files. "We haven’t lost a document in four years. And the time spent retrieving files is saved," says Simms. "When a client calls with an IRS notice, you need the client’s file. It may not be in central filing and you don’t know who has it. With this technology, you can pull up a document in seconds and deal with the issue while still on the telephone," he adds.

Hardware issues may get short shrift. "You need to evaluate your hardware when you’re evaluating paperless software. The software makes it apparent when you have machines that are old and are relying on them to do everything. We ran into problems when some of our machines had not been converted to Windows 2000 and some had," advises Candace Wright, audit director with Postlethwaite & Netterville based in Baton Rouge, La.

First and foremost in evaluating this issue, according to Simms, is that the leadership of the organization has to decide that this is the direction it wants to go in. He suggests that generally a technology committee, made up of five to seven people depending on the size of the organization, should be formed. He believes it is preferable to have diverse elements of the firm represented, an IT person for technical advice as well as the tax, administrative, and audit people.

Next, the committee has to decide what are the best products on the market from the audit, tax, the practice management side and select them and decide how to use the applications. "One of the worst things most firms do is they spend top dollar for some very good products and then only use about 10 to 20 percent of the functionality," says Simms whose firm uses Caseware. He indicates that each practice area’s needs should be considered so that they integrate well with each other. While some firms may choose to automate just their accounting and audit practices, from Simm’s holistic point of view, "you can’t just look at audit and run wild with what they want to do. It has to be managed from the organization standpoint."

Wright’s firm did demos of four leading paperless products and all were very good, she notes. "ePace was relatively inexpensive then, it looked fairly user friendly, and we used ProSystem tax software, which we thought would integrate well with it. Integration with tax prep was one of our objectives."

When Simms’s firm starts an engagement, it imports the trial balance; as a general policy, the staff is required to import detailed general ledgers. This provides, he notes, a client database from which you can do a lot of data extraction and manipulation without taking it to another product. "So if we’re looking for repairs and maintenance over $1,500, we can have that work paper generated electronically in 10 seconds. Over a two-year period, we saw about a 35 percent reduction across the board on our accounting practice time, that’s audit, compilations, and reviews," he says.

"Once we picked Caseware, we developed industry templates. We started with the standard audit, compilation, and review templates, which would encompass almost everything you need on an engagement, the checklists, the programs, the standard financial statements built within the template. Then we modified it to make it industry specific," describes Simms.

"Accountants have the capability of handling their most complex engagement in a completely paperless environment. Engagement documents, including checklists, Word and Excel documents, scanned images, lead sheets and schedules, audit reports and financial statements, can be stored electronically in a central location," says Jack LaRue, marketing vice president for Creative Solutions, a Thomson business, which produces GoSystem Audit. Once the engagement is complete, he indicates that final documents can be transferred to FileCabinet Solution, which is a complete electronic document management system designed specifically for accounting firms.

Another firm that has been applying paperless technology for four years is Clark Nuber in Bellevue, Wash. They also use ProSystem fx Engagement. According to Tom Sulewski, shareholder in charge of the audit practice, it was chosen because it was user friendly, and was Word and Excel-based. "The ease of conversion was the driving force for us. It was the first product we saw by which you could look at the screen and see the similarity to hard copy work papers."

He believes the degree to which you go paperless is affected by what your workflow looks like. Are you in the field a lot? If so, he indicates that you need laptop capability to get out there. Other issues include how many people are sent to the field during an audit and how will they be connected to each other. "We use infrared data transfer wireless technology so you point laptops at each other to transfer a file. You need an investment in the hardware for that," says Sulewski.

Parente cautions those who are interested in this that it’s taken almost three years for her firm to start seeing many benefits. "You may not see them right away. You should see a payback within a couple of years. We didn’t notice an increase in profitability until year two," she says.

Handling Client Info

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