Rapid technology advancements over the last decade have changed the way the so-called stodgy accounting profession works.  I remember the days of lugging a Compaq computer to my client’s offices.  These computers were anything but compact, as they weighed about twenty pounds! Well, in addition to profound changes in hardware, software used by the accounting profession has also progressed.   Margolis and Company is at the forefront of these changes and specifically, is a leader in the use of data extraction software.  Using data extraction software has revolutionized the way Margolis and Company performs accounting and auditing projects and enables us to provide valuable additional services to our clients.  This article describes the software, our success stories, and how you can benefit from its use.

What is data extraction software?

Data Extraction software is used to analyze information processed by your computer system.  It allows us to slice and dice information in any way imaginable.  We can now analyze large amounts of information much more efficiently than previous manual methods.  Gone are the days of paging through long computer reports to select items for testing or further analysis.  Gone are the days of manually adding computer runs.  The software allows us to sort information in various ways, compare it with other data files, combine data files, find exceptions, perform sampling, analyze aging, and perform complex calculations and extractions.  Virtually any data that is produced by a computer can be downloaded into our data extraction software. 

Examples of its use and our success stories

We use data extraction software in the normal course of our audit testing and in providing value added services to our clients.  An example of an audit procedure that data extraction software has turned into a valuable service if as follows:

Testing that inventory is valued at the lower of cost or market is a routine audit procedure.  In the past, a selection of items was manually chosen and inventory prices were compared to sales records.  Using data extraction software turned this routine audit task into a more efficient one that provides valuable and timely information to our clients.   We can now test 100% of the inventory efficiently by downloading inventory and sales data files into our software.  For one distributor client it meant identification of approximately $250,000 (or approximately 10% of it’s inventory) as slow moving inventory (less than 1 turn annually).  Furthermore, the slow moving inventory was identified in September, which allowed the client to take action prior to their December year-end. Based on the information we provided, the client held special sales and increased returns to vendors, which reduced slow moving inventory and increased cash flow.  The client also was able to address at an early date what may have been a large audit adjustment.

Another area where we’ve had success is identifying duplicate or unusual payments to vendors.  It is surprising that companies can pay the same invoice twice, but it happens.  Data extraction software allows us to efficiently identify these duplicate payments or any other unusual payments.  One search for duplicate payments for a small business client found duplicate invoices for over $10,000.  Also, for that same client, all large purchases were analyzed and it was noted that some unusual payments were made without any management authorization.  The client was able to get a credit from the vendor it double paid and worked to improve its internal controls over disbursements.

We have also improved our audit efficiency by using the software. This helps keep your audit costs down and allows us to audit via the computer rather using your staff to provide us with stacks of paper.  Examples of uses of data extraction software that improve audit efficiency are:

• Download trial balances and import them into trial balance software for quick financial statement turnaround.
• Download accounts receivable detail, select items to confirm, and merge the A/R information with our confirmation form letter.  This saves your people from typing A/R confirmations.
• Analytically test inventory by downloading inventory files and comparing current year prices and quantities to prior year information.  Also, compare inventory files to sales files.
• Analyze accounts payable files for debit balances and perform the search for unrecorded liabilities using the data extraction software.

Fraud audits

Companies may suspect fraud or may want a “check up” to make sure fraud is not occurring in their business.  Data extraction software enables us to quickly identify any unusual or suspicious items.  We use the software to look for unusual relationships between data, unusual transactions, search for missing documents and duplicate items.  Some uses of the software in fraud audits is as follows:

Cash Disbursements

• Examine and summarize cash disbursements by vendor name for further investigation.
• Detect unauthorized cash disbursements to employees by comparing address and names per the vendor files to the payroll files.
• Identify checks written to “cash”.
• Examine cash disbursements for amounts just under approval limits.
• Examine cash disbursement patterns for certain vendors to search for possible kickback situations.
• Compare vendor addresses to employee addresses.

Accounts Receivables and Sales

• Identify partial cash applications to invoices.
• Identify time lags between deposit dates and credits to customers’ accounts.
• Search for other customer payment diversion tactics.
• Identify potential kickback situations involving abnormal sales prices.
• Search for unusual commission payments.
• Compare shipping addresses to employee addresses.
• Identify unusual or large journal entries.

Other value-added services

With data extraction software we can provide valuable additional services efficiently.  Some examples of these are:

• Analyze sales and profitability by product, salesperson, location, customer, etc.
• Analyze carrying costs by customer based on the number of days it takes to collect receivables.
• Compare sales by product, product line, location, etc. to inventory balances to identify possible overstock or obsolescence.
• Compute gross profit by product, product line, location, etc.
• Analyze purchases by vendor to assist in negotiating volume discounts.