[IMGCAP(1)]What if someone told you that your firm could replace much of the work performed by its audit staff with an affordable, automated system?

That this system would catch fraud, error and misuse in real-time. That this system was significantly more accurate and thorough. That this system cost dramatically less than your current service fees. And that you’d be happy to recommend this solution, even though it would cost your firm thousands of billable hours?

You’d think that this person was out of his mind. But that’s exactly what’s happening.

The technology is called continuous monitoring, or CM, and it’s creating significant new opportunities for high-margin engagements and increased customer loyalty for progressive CPA firms. Here’s how it works.

CM 101

CM is a software-based technology that automatically extracts key transaction information from enterprise resource planning and other financial systems from across an organization. The data is kept in its own data warehouse, so that consistent, comprehensive analysis can take place across disparate, incompatible systems and databases.

Once these apples-to-apples comparisons become possible, CM applies a wide variety of forensic techniques to each transaction as it is executed. This near-real-time capability means that improper or fraudulent transactions are identified almost immediately, rather than requiring you to wait weeks or months for reconciliation or post-closing audits.

These powerful analytics contain the knowledge that only a small subset of top-tier auditors possesses. It’s like having a team of “virtual analysts” who work impossibly fast and impossibly accurately, operating on core financial data on a 24/7 basis.

Consider this simple example. The only difference between these two vendor numbers:

000028368847
28368847

is that one has four leading zeroes, and the other doesn’t. If both are properly entered into two different ERP systems, then audit controls will see them as two different vendors. It’s quite possible—even likely—that the vendor will receive duplicate payments, or that an intentional fraud can take place by taking advantage of this discrepancy.

An audit team might find this discrepancy if it appeared in a sample, but only weeks or months after the duplicate check was cut, mailed, deposited and cleared. CM finds these errors immediately, before cash leaves the premises.

CM does much more than alert you if a transaction violates an audit control. It also documents why a transaction was flagged. This insight uncovers potential problems within audit controls or business processes that audit-based tools can’t see, let alone resolve. It’s this extra level of analysis that sets CM apart from other solutions.

A more complex example helps demonstrate the power of CM. A purchasing manager realizes that the company can save an extra $0.40 per unit by moving an order from November back into October. The discount looks like a good deal, and so the order is placed.

However, that “good” deal actually costs the company far more than it saves. Extra units need to be ordered due to spoilage and leakage. The order can’t be consumed until December, and so it must be stored for weeks. The excess inventory is taxed during this storage period.

A human auditor might—eventually—be able to recognize the net loss. CM finds it immediately. Given this actionable, real-time insight, the purchasing manager knows not to place the order. More importantly, an opportunity has been uncovered for improving the purchasing process, which will continue to save the company money in the future.

New Opportunities for Accounting Firms

Of course, multinational enterprise organizations have resources to invest on CM software and services. Many also maintain large internal audit departments, sophisticated performance management organizations and other programs dedicated to efficient operations.

For smaller organizations, CM looks expensive. And the loss of staff-based external audit business is something that most accounting firms would never consider.

The truth is that CM is a powerful tool for accounting firms to move from lower-margin activities such as audits towards high-margin consulting engagements, in which interpreting CM analytics and converting those findings into operational improvements becomes the driver for client value.

There are two factors behind this evolution. The first is the progression of CM from software that must be purchased and deployed to a more flexible model. CM is now available as Software as a Service—in effect, a cloud-based offering that operates much like iTunes or Gmail, except that it protects transaction integrity rather than sells music and movies or provides universally available email.

The CM vendor hosts the hardware and software necessary to extract financial data and process the analytics. The client only pays for the results of the analytics, not the infrastructure itself. Alerts, analytic reports and recommendations for remediation are communicated with the client and the accounting firm in real-time. From there, the accounting firm provides both external audit functions for financial reporting and documenting regulatory compliance, and operations consulting, as in resolving the purchasing example described above.

The second factor is that relatively few organizations have anywhere near a sufficient number of technical staff or managers who are experienced in working with analytics, or in converting data-driven analyses into action plans for improving the organization. By one estimate, American businesses will face a shortage of more than 190,000 workers with the necessary skills by 2018—and need 1.5 million managers who are capable of interpreting analytics and taking action based on those results.

The result of these two trends is a value chain in which an accounting firm can deliver high-margin value through one or more of the following: facilitating the deployment of a CM solution, tuning and interpreting the analytics results for the client, and providing the ongoing consulting needed to convert CM’s actionable information into concrete results.

Accounting firms are uniquely positioned to provide this expertise to their clients. CPAs are, by definition, trained in the proper use of data to understand financial results—and how to connect the root causes behind the numbers with plans for improving the organization. In addition, accounting firms are structured specifically to service multiple businesses from a central core of trained staff. Therefore, one accounting firm whose staff is well trained in CM can deliver solid benefits to a wide range of businesses, at lower cost than those organizations developing the same capabilities in-house.

One example of this model is the Defense Forces Accounting Services shared services accounting organization. DFAS supports all accounting functions for the various branches of the United States military, and uses CM to prevent improper and duplicate payments. The savings are substantial—as much as $1 billion in the first half of 2011 alone.

While DFAS purchased and operates a full CM implementation, the organization also retained a major accounting firm to help implement the initial deployment of the CM software, and continues to use that firm to interpret the results of the analytics that indicate areas for operational improvement. Funds that otherwise would go to human-driven audits—and money saved by stopping improper transactions—are instead used to continuously improve audit controls and business processes across the organization.

Businesses change over time, and accounting firms need to change to keep pace with their clients’ evolving needs. As more organizations realize the value of being able to recognize fraud, misuse and error in real-time—and of the power of analytics to improve processes and prevent current issues from being repeated in the future—firms need to take advantage of the lack of qualified analytics personnel to service their clients and provide higher-margin opportunities for the firm itself.

Continuous monitoring is the key to making this transition efficiently and effectively. Accounting firms that become facilitators for CM have the rare opportunity to lower their clients’ audit costs while simultaneously enhancing other, higher-value revenue streams —the consulting necessary to implement CM, the ongoing interpretation of CM analytics, and the process improvements that help clients continue to increase efficiency and profitability over time. It’s a tremendous opportunity for firms with the vision to turn it into reality.

Patrick Taylor is CEO of Oversight Systems, an Atlanta-based provider of continuous transaction monitoring software.

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