The Evolution of the Audit

There was a time when audits meant, above all, quantification. Quietly, on rubber-soled shoes, the men in the gray flannel suits and the bleached white gloves would slip into the office, pulling files and raising tension. Numbers were crunched, standards were compared, deviations were noted, long columns of longer numbers were peered over, and the two was inevitably carried. The men in gray would nod wisely and point to this and that. The numbers are truth, they would mutter to themselves. The numbers never lie. “Look at those numbers, Bob,” the executive would holler, “someone in claims really dropped the ball this year, didn’t they?” Bob’s agreement was as inevitable as the carried two. Looks like the “Rollercoaster Indemnity Company” was going to have to get tough with Stan Uris in claims. The men in gray would glance at one another and shrug. It did not matter to them whether or not anyone got tough with Stanley Uris, their job was done, and so away they would slip, as quietly as they came.

The problem is, Stan’s a pretty good manager. He knows his protocols, his people, his vendors and clientele. What he doesn’t know is why his numbers are down. He has strict guidelines for claims disposition, processes in place to monitor frequency and severity, is focused on cost containment and expense reduction, and is respectful and fair, but firm with his staff – it seems like he is doing everything right. Yet the numbers tell him that something is wrong.

Here is the crux of one of the major limitations of the traditional audit: it is passive. An auditor collects information, compares it against other information, then presents that information and walks away. It is helpful, certainly, but it is incomplete; an audit will not give you any help in addressing the hidden truths it manages to uncover. In a very limited way, a number may be able to tell you where you are, but it can not tell you where you want to be, and it will never tell you how you’re going to get there.

BEYOND NUMBERS

The second limitation is slightly more insidious: an auditor can only count the countable, yet an organization is made up of things unquantifiable, but very important to the process of industry as a whole: methods, ideologies, systems, standards, protocols. It is these, not ‘the numbers’, which carry an organization forward.

The audit still serves its purpose, and still has a role to play quantifying the quantifiable. But business has evolved. New management ideologies – ideologies formed, tested and refined in crucibles at Toronto, New York, and London – demonstrate that managing the hard numbers is only one part of leadership; we also have to manage performance. We have to look at things like communication, teamwork and intellectual property. A method must be put into place to quantify these things. An audit can tell you that Stan’s department settled 15,000 claims this quarter, but what it cannot tell you is how he was managing the performance of his staff, or the effectiveness of his leadership, or if he was following policy correctly.

The traditional audit is a rigid, unyielding arrangement. It is static and inflexible, and there is no wonder it can no longer be the exclusive tool for business examination and verification. It is time for the audit to change, to evolve. It must become active, rather than passive, dynamic rather than static. This new process (for process it should be – a course of action rather than a periodic accounting) should not only illustrate the problem, but also point toward clear solutions. It should still show the numbers, but also much more.

The framework of this review process should allow for tuning. As your business changes, the process should change with it – working for you. We need a process in place which will show us the problems, allow for those problems to be solved, then tolerate recalibration so when next we measure, we can focus less on our strengths, and more on our weaknesses, yet never lose sight of the big picture. The fixed audit gave us awareness; its progressive cousin, the review, will give us both insight and knowledge.

PERFORMANCE FOCUS

So, we apply this evolved audit, our performance review process, to the problem Rollercoaster Indemnity Company is having in claims with Stan Uris; we know claims’ numbers are up. We do not know why. We also know that the criteria used in the traditional audit did not really shed much light on the problem beyond confirming that which the management at RIC already knew: that Stan’s numbers were up. So we will focus not on the numbers, but on the performance of Stan and his people.

By looking at the factors that indicate good performance, we can determine whether Stan and his team are following company protocols. Factors might include initial action, reserving, file management and so on. Weight these factors according to their importance, and see how well Stan and his team are doing.

Overall, we find that both Stan and his people are doing a bang-up job. The notes from the files pulled illustrate that Stan’s department seems to be following property adjusting guidelines and sticking to the preferred vendor list. Property adjustment regs at RIC state that a loss of more that $10,000 needs two estimates. Notes show that those estimates are being done. On the surface, all appears well.

Look a little deeper, though, and we find some serious problems. Here, a kitchen fire restoration is within the $10,000 limit, however, upon closer inspection, it seems that the work could have been completed much more quickly if only the file management criteria had been adhered to. Similarly, a flooded basement has been restored with a significant, yet inexplicable delay. As more files are pulled, we find similar trends. The proper estimates were in on time, but repairs were not completed on a timely basis. Nevertheless, there were no signs of overall customer dissatisfaction. Here is where the leakage is occurring; Stan and his team have been using preferred vendors, but not holding them up to their own performance standards. Apparently, an internal communiqu regarding file management had been circulated months ago, but was filed, never to be referred to again. As a result of this one time lack of communication, Stan could not know if his team was holding its preferred vendors up to their own standards. This simple lack of follow-through has resulted in losses to the tune of thousands of dollars per file, on a significant number of the files handled over the last quarter.

MAKING IT RIGHT

At last! Here we have a concrete reason claims is in the pooper: a simple lack of upholding standards. Now we can do more than shake a sheaf of papers at a confused and terrified Stan Uris. Now, not only can we show him the problem, but also how to fix it. To ensure that Stan and his team proactively uphold file management standards files are being reviewed every 30 days to ensure the standard is being met. Problem solved.

Stan is a good manager, and he is working with good people. Like everyone, he makes mistakes, but, like most people, he wants to fix things, and make them right again. Now that he has direction, Stan will implement an action plan based on the knowledge he gained from this evolved review and make the necessary changes. Indeed, he would have done so earlier, if only someone, or something, could have told him how.