Intelligent controls bidding to end the days of budget blowoutsby
For many large organisations, budget overspends and deviations from forecast are simply a fact of life. When this happens, it is the responsibility of the accountants to fix the issue.
When the inaccurate numbers concern the work of the accountants themselves it can be a doubly difficult challenge, but new technology entering the market promises to revolutionise engagement planning and consign costly budget overruns to the past.
Inaccurate forecasting and the resultant inflated costs have become so common today as to be an apparently accepted part of hiring auditors for FTSE 350 firms. As concerns on overruns grow, an appearance by Big Four executives in front of the government’s business select committee last year stoked the flames.
When pressed, PwC, Deloitte, KPMG, and EY told the Commons Business, Energy and Industrial Strategy (BEIS) select committee they often did not charge the full cost of inspecting books, mainly because the scale of the tasks are not obvious from the outset.
Clive Stevens, chairman of the Association of Practising Accountant, told the committee in his experience, audit quotes are often fixed but subject to a number of provisos. If there is more work or something extraordinary, it is the auditor’s responsibility to go along to the chair of the audit committee, Stevens said.
“It happens a lot. It is not necessarily a confrontational thing. In my experience, the best clients welcome some challenge and want ideas. Provided the relationship is great, that is a discussion and a commercial discussion. There can be extra fees.”
MPs were given data from large audited companies where costs were at least 10% more than originally planned.
- Deloitte reported 50% of its FTSE 350 audits had cost overruns of more than 10% of the initial expected sum.
- EY said 32% of its FTSE 350 clients in 2018 were subject to a cost hike of more than 10%.
- PwC said 43% of its large company audits blew the budget by more than 10%.
- KPMG reported 16% of its FTSE 350 audits had a budget overrun of more than 10%.
Research conducted by McKinsey in collaboration with the University of Oxford suggests that half of all large IT projects - identified as those with initial costs exceeding £15m - blow their budget. On average, large IT projects run 45% over budget and 7% over time while delivering 56% less value than predicted. The results were consistent across all sectors.
McKinsey executive Michael Bloch said it was often the case the finance department became involved too late on in the lifecycle of a project, resulting in delays and complex changes which can cause costs to spike.
Critics claim the firms are using audit as a “loss-leader” to secure more lucrative consultancy work from their clients. However, this belies the myriad reasons why executing audits has become increasingly complex and fraught with risk.
“The select committee data exposed that budget write-offs are happening on a very large portion of engagements, and ultimately it means firms are not making the margins they are expected to make,” said Andrew Bone, chief executive and co-founder of intelligent planning software company Airts.
“When engagements are planned so far ahead, inevitably they are not going to be exactly right. The crux is most firms, large or small, are essentially relying on a spreadsheet that can be a year out of date.”
It is a known problem, one that the industry is embarrassed to talk about publicly, rather than a potential issue that can crop up unexpectedly.
“Budgets are created well ahead of time; nothing may happen for six, or even 12 months before the work eventually starts, and this is where the problems begin,” said Bone.
“The manager will be reviewing if everything is on track, and it’s such a manual, laborious job, which is essentially spreadsheet jockeying, that it presents a fairly imperfect view of the predicted end position of an engagement.”
As accounting experts told the business committee, a budget is an ‘ideal world’ scenario easily blown out, especially on larger engagements where perhaps the first identified member of staff may not be available.
The human element also plays a major factor, as sandbagging over requests for staffing or materials may occur when an auditor thinks they will be delivered less than their request. Every auditor working today will have underestimated how long a project will take at least once in their career. Planning fallacy and over-optimism are entirely natural in a ‘best-case scenario’; to get the work signed off there is pressure to make it look like a good job.
Aside from the financial impact, there is an often overlooked human element of budget overruns, where auditors take on additional work and put a strain on their own work/life balance. It can impact productivity, and can even push away staff who are subject to last-minute reassignments. The quality of the audit itself can suffer, and the knock-on effect can be lowered standards across the sector.
“There is more we could do, more the sector could do, to learn from the past,” said Bone. “There is a tendency to forget what happened last year, and think it will be different next time we plan, and it’s probably not.”
The future of intelligent planning
If the problem is one borne of manual processes, new technological advances that use automation in planning may offer the solution.
Whatever budgeting or forecasting system an organisation uses, if it is laborious and time-consuming for humans to monitor then mistakes will invariably occur. Intelligent systems that capture an engagement budget outright will rid the sector of its addiction to spreadsheets.
Real-time, live views of the engagement progress are a critical advancement in planning technology, creating systems that can provide an instant snapshot of a project and stop the kinds of problems that emerge “last minute”.
Intelligent controls are also capable of transforming other aspects of budget sign off, giving notifications and other nudges when something is going off track, adding flexibility and breathing room in the approval process.
“Automation helps by having your future schedule planned out, so you are not firefighting,” said Bone. “And because you have that planned out, you have much better visibility if you are running over budget.”
The journey to automation in audit may seem a steep climb for some firms at first, but, with better margins, improved reputations for accuracy, and happier clients as clear outcomes during a time of heightened scrutiny for the accounting sector, there has never been a more pressing time to make that first step.