SlideShare una empresa de Scribd logo
1 de 4
Descargar para leer sin conexión
A fresh approach
                         The Model Audit




Financial models are at the heart of major
finance transactions. We believe the standard
approach to auditing these models is flawed.
Our fresh approach offers tangible benefits for
both senior funders and shareholders.
A flawed process
A typical financial model audit carried out by an                  Documentation – what you don’t know can
accountancy firm will consist of the following steps:              hurt you
• a review of model logic and calculations (including tax          A key role of the auditor is to check the model to project
  and accounting compliance);                                      and finance documents prior to financial close. The
• a review of the model to supporting documentation; and           following are typical failings:

• a report on model issues.                                        • key documents are produced late in the transaction,
                                                                     sometimes finalised only hours or minutes before close,
These steps are performed iteratively, culminating in the            a review is either then rushed or does not take place at all;
production of an opinion letter confirming model integrity
which is issued on financial close.                                • documents which are erroneously considered as not
                                                                     material, receive scant attention;
Our experience, drawn from the practice of both auditing
and being audited, combined with discussions with                  • this work is often undertaken by analysts with little
shareholders and funders, reveals a level of dissatisfaction         commercial experience and nuances which impact the
with each stage of this typical process.                             robustness of an operational project company are
                                                                     missed.
Model logic review – missing the unknown
unknowns                                                           Reporting – more is less
Model auditors typically check model logic in two ways:            After each iteration of review, the model auditor will
                                                                   produce a list of issues for the attention of funders and the
1. They run spreadsheet mapping tools to check for model           model builder. When we send off a bid model to an auditor
   consistency.                                                    which has been subject to internal review, we are often
2. They check the spreadsheet ‘cell-by-cell’, ticking as they      surprised by the weight of the tomes received in return!
   go to confirm correctness.                                      In nearly all cases, closer inspection reveals that no
The first of these techniques, spreadsheet mapping, is             commercially significant errors have been found. Instead,
certainly necessary to checking the consistency of any             comments consist of a combination of a download from
complex spreadsheet. However, there can be a tendency              whichever software package has been thrown at the model
for over-reliance on this technique, and in some cases this        and a list of general ‘observations’ which can be applied to
is thought to be a sufficient test in itself. It must be           any model review. While superficially a large audit report
remembered that these tools only check for                         may suggest rigour, in reality it is more likely to reflect an
consistency and poor referencing, they do not actually             indiscriminate approach, lacking sufficient focus on
analyse any logic.                                                 correcting commercially significant errors.

The second of these techniques, ‘cell-by-cell’ review, is not      Model opinion – ‘Insurance’ or ‘Assurance’
particularly satisfactory. As a typical model may contain          In our view, there is an important problem with the way
over 5,000 distinct and often complex formulas the task of         that the role of the auditor is viewed.
checking each is a daunting one. In reality, the main
drawback to this sort of checking is that it is proven to be       Funders typically view the opinion letter as providing
far too boring for the human brain! Errors will be missed.         insurance, believing the auditor will pick up the tab if errors
Research has suggested that cell-by-cell reviews can be            are subsequently found. Also, as an opinion letter is a
expected to capture around 70% of errors. This is actually         condition precedent for the credit agreement they also
a fairly good success rate – but you may have sleepless            tend to view the audit as an important piece of ‘admin’.
nights considering the unknown 30%!                                The criteria for selecting an auditor then becomes a
                                                                   straight comparison of who will offer the highest ‘cover’
Another issue with the ‘cell-by-cell’ process is that it is time   for the lowest price.
consuming and therefore costly. There is no ‘short-cut’ in
such a process which will enable an early view to be given         The auditor is also very aware of potential liability and
on model accuracy. This has historically meant that model          funders requirements, and this may lead to them running
reviews are only carried at the last possible moment and           the following business model: offer the minimum liability
that there has been no appetite to procure an independent          caps required for market entry, reduce the costs of
review at an early stage in the competitive process. This          delivering the actual audit, employ a good lawyer to draft
leads to the unfortunate position that commercially                terms and conditions and finally, caveat his opinion as
significant errors either jeopardise a project or the              strongly as possible!
consequences must be taken on the chin by shareholders.
A fresh approach
So far, we have looked at a number of areas where               Scope of work – a stitch in time…
the current model audit process might disappoint.
                                                                There is a clear case for rethinking the scope of the
More positively, here are some suggestions for
                                                                auditor’s work.
improvement.
                                                                In the world of Competitive Dialogue, it becomes
Methodology – it is rocket science!                             increasingly important for reliance to be placed on the
In order to look for improvements to the standard               financial model at an earlier stage of the transaction.
‘cell-by-cell’ approach it is useful to look to other           Requesting some level of sign off from an independent
industries. When NASA commissions its complex                   source as to model logic correctness should be a
models and needs to be really sure its computations             requirement of final tenders. This is not to say that a full
are correct, it does not ask one firm to model and              audit is required, but as has been outlined above an early
another to audit. Instead, it will give the same job to         consistency check can be carried out on which an
two sets of developers and see if they come up with             independent reviewer can give a letter of comfort. This
the same answers. This rigorous approach would                  check need not be prohibitively expensive and, as the
historically have been viewed as too expensive in the           auditor is completing work which will be needed later if
project finance market.                                         the bid is successful, fee structures could be tailored to
                                                                minimise cost impacts during the bid stage.
However, the increasing prevalence of ‘template’
models and the standardisation of financial structures          Also, a robust approach should be taken to the selection
mean that it is now possible for an initial model of a          of auditor and agreement to the detailed scope of work,
relatively complex scheme to be constructed in a                including:
matter of hours. This opens the way for the ‘NASA               • expectations for scope of document review;
approach’ to be used in model audit. A commercially             • timescales for reporting;
astute auditor independently creates a shadow model             • approach to sensitivity review;
using project data inputs, the outputs of the shadow
                                                                • details of the commercial experience of the analysts
model are then compared to the model under test.
                                                                  who will be undertaking the review; and
Any discrepancies can be fully interrogated, and the
‘errors’ in either shadow or test model corrected.              • agreed processes for ensuring final auditor sign off of
                                                                  completed document review.
This method has three very important advantages to
the standard approach. Firstly, by challenging the              On this last point, by ensuring that the auditor’s opinion
analyst to create a replicated model you retain his             letter is matched to the list of final documents, and
interest – this is crucial to ensuring a job well done.         making this an explicit condition precedent, many
Secondly, the integrity of the review is clearly                potential issues can be avoided.
demonstrated; if the analyst achieves a different               Finally, all parties should place the importance of ensuring
answer, the discrepancy is clear – and it needs to be           model correctness high on their priority list. While having
explained. Thirdly, an early indication of the accuracy         recourse to the auditor’s potential liability has a role in
of the model under test can be given, this can be used          ensuring rigour, it is in everyone’s interests that such
to inform commercial decision making.                           remedy is never required.




        Mazars' fresh approach
         Mazars’ fresh approach offers tangible benefits when compared to standard offerings.
         • We are confident that our replication methodology is more robust – we offer a separate, not subordinate,
           liability to shareholders to demonstrate this.
         • We are prepared for the Competitive Dialogue process – we will undertake reviews prior to bid submission
           and on a contingent fee basis to ensure the robustness of your bid.
         • We tailor our scope of work to your requirements – you will find our fees are highly competitive when
           compared to standard offerings.
Please get in touch. . .


For more information on Mazars’ fresh approach to model audit, please contact:

Bob Green
T: +44 (0) 20 7220 3469
M: +44 (0) 7794 031 190
E: bob.green@mazars.co.uk


Jerome Brice
T: +44 (0) 20 7220 3386
M: +44 (0) 7794 031 163
E: jerome.brice@mazars.co.uk




                                                                                                                                                                                © Mazars LLP 2007 20911




                                   Mazars LLP is the UK firm of Mazars, an international advisory and accountancy group, and is a limited liability partnership registered in
                                   England with registered number OC308299. Mazars LLP is registered by the Institute of Chartered Accountants in England & Wales to carry
                                   out company audit work.


 mazars.co.uk                      We have offices in Bedford, Birmingham, Brighton, Bristol, Dudley, Edinburgh, Glasgow, Huddersfield, Leeds, London, Luton, Manchester,
                                   Milton Keynes, Nottingham, Oxford, Poole, Southampton, and Sutton

Más contenido relacionado

La actualidad más candente

The 7 Secrets of Highly Effective Retrospectives (DCSUG)
The 7 Secrets of Highly Effective Retrospectives (DCSUG)The 7 Secrets of Highly Effective Retrospectives (DCSUG)
The 7 Secrets of Highly Effective Retrospectives (DCSUG)Excella
 
The Toyota Kata Starter Kata
The Toyota Kata Starter KataThe Toyota Kata Starter Kata
The Toyota Kata Starter KataMike Rother
 
Financial plan training and templates
Financial plan training and templatesFinancial plan training and templates
Financial plan training and templatesAurelien Domont, MBA
 
Client Success Journey presented by Innography at Totango Tour
Client Success Journey presented by Innography at Totango TourClient Success Journey presented by Innography at Totango Tour
Client Success Journey presented by Innography at Totango TourTotango
 
Building the Fit Organization (with guest presenter Dan Markovitz)
Building the Fit Organization (with guest presenter Dan Markovitz)Building the Fit Organization (with guest presenter Dan Markovitz)
Building the Fit Organization (with guest presenter Dan Markovitz)TKMG, Inc.
 
From Teams to Tribes: Creating a One Team Culture
From Teams to Tribes: Creating a One Team CultureFrom Teams to Tribes: Creating a One Team Culture
From Teams to Tribes: Creating a One Team CultureEm Campbell-Pretty
 
12 Key Levers of SaaS Success
12 Key Levers of SaaS Success12 Key Levers of SaaS Success
12 Key Levers of SaaS Successsaastr
 
Bsc workshop
Bsc workshopBsc workshop
Bsc workshopparag11
 
Dashboards By Function Powerpoint Presentation Slides
Dashboards By Function Powerpoint Presentation SlidesDashboards By Function Powerpoint Presentation Slides
Dashboards By Function Powerpoint Presentation SlidesSlideTeam
 
Operational Excellence
Operational ExcellenceOperational Excellence
Operational ExcellenceKamraan
 
Customer success playbook
Customer success playbookCustomer success playbook
Customer success playbookDevranjan Dash
 
Strategy to Execution: Tips to Execute Your Strategy With Excellence.
Strategy to Execution: Tips to Execute Your Strategy With Excellence.Strategy to Execution: Tips to Execute Your Strategy With Excellence.
Strategy to Execution: Tips to Execute Your Strategy With Excellence.Avi Mizrahi, MBA, BBA.
 
The Five Coaching Kata Questions
The Five Coaching Kata QuestionsThe Five Coaching Kata Questions
The Five Coaching Kata QuestionsMike Rother
 
Lean Leadership _ ARMA 2015
Lean Leadership _ ARMA 2015Lean Leadership _ ARMA 2015
Lean Leadership _ ARMA 2015CSoltero
 
Operational Excellence Team Vision
Operational Excellence Team VisionOperational Excellence Team Vision
Operational Excellence Team VisionTamara Hammond, CSM
 
The Complete Lean Enterprise: Value Stream Mapping for Office and Services
The Complete Lean Enterprise: Value Stream Mapping for Office and ServicesThe Complete Lean Enterprise: Value Stream Mapping for Office and Services
The Complete Lean Enterprise: Value Stream Mapping for Office and ServicesAssociation for Manufacturing Excellence
 

La actualidad más candente (20)

The 7 Secrets of Highly Effective Retrospectives (DCSUG)
The 7 Secrets of Highly Effective Retrospectives (DCSUG)The 7 Secrets of Highly Effective Retrospectives (DCSUG)
The 7 Secrets of Highly Effective Retrospectives (DCSUG)
 
Lean Six Sigma
Lean Six SigmaLean Six Sigma
Lean Six Sigma
 
Business Process Improvement Frameworks Reference Guide
Business Process Improvement Frameworks Reference GuideBusiness Process Improvement Frameworks Reference Guide
Business Process Improvement Frameworks Reference Guide
 
The Toyota Kata Starter Kata
The Toyota Kata Starter KataThe Toyota Kata Starter Kata
The Toyota Kata Starter Kata
 
Financial plan training and templates
Financial plan training and templatesFinancial plan training and templates
Financial plan training and templates
 
KAIZEN COSTING
KAIZEN COSTINGKAIZEN COSTING
KAIZEN COSTING
 
Client Success Journey presented by Innography at Totango Tour
Client Success Journey presented by Innography at Totango TourClient Success Journey presented by Innography at Totango Tour
Client Success Journey presented by Innography at Totango Tour
 
Building the Fit Organization (with guest presenter Dan Markovitz)
Building the Fit Organization (with guest presenter Dan Markovitz)Building the Fit Organization (with guest presenter Dan Markovitz)
Building the Fit Organization (with guest presenter Dan Markovitz)
 
From Teams to Tribes: Creating a One Team Culture
From Teams to Tribes: Creating a One Team CultureFrom Teams to Tribes: Creating a One Team Culture
From Teams to Tribes: Creating a One Team Culture
 
12 Key Levers of SaaS Success
12 Key Levers of SaaS Success12 Key Levers of SaaS Success
12 Key Levers of SaaS Success
 
Bsc workshop
Bsc workshopBsc workshop
Bsc workshop
 
Dashboards By Function Powerpoint Presentation Slides
Dashboards By Function Powerpoint Presentation SlidesDashboards By Function Powerpoint Presentation Slides
Dashboards By Function Powerpoint Presentation Slides
 
Operational Excellence
Operational ExcellenceOperational Excellence
Operational Excellence
 
SIC (Short Interval Control) Methodology
SIC (Short Interval Control) MethodologySIC (Short Interval Control) Methodology
SIC (Short Interval Control) Methodology
 
Customer success playbook
Customer success playbookCustomer success playbook
Customer success playbook
 
Strategy to Execution: Tips to Execute Your Strategy With Excellence.
Strategy to Execution: Tips to Execute Your Strategy With Excellence.Strategy to Execution: Tips to Execute Your Strategy With Excellence.
Strategy to Execution: Tips to Execute Your Strategy With Excellence.
 
The Five Coaching Kata Questions
The Five Coaching Kata QuestionsThe Five Coaching Kata Questions
The Five Coaching Kata Questions
 
Lean Leadership _ ARMA 2015
Lean Leadership _ ARMA 2015Lean Leadership _ ARMA 2015
Lean Leadership _ ARMA 2015
 
Operational Excellence Team Vision
Operational Excellence Team VisionOperational Excellence Team Vision
Operational Excellence Team Vision
 
The Complete Lean Enterprise: Value Stream Mapping for Office and Services
The Complete Lean Enterprise: Value Stream Mapping for Office and ServicesThe Complete Lean Enterprise: Value Stream Mapping for Office and Services
The Complete Lean Enterprise: Value Stream Mapping for Office and Services
 

Similar a Mazars Model Audit Methodology

Insights-Model-Validation
Insights-Model-ValidationInsights-Model-Validation
Insights-Model-ValidationMike Wilkinson
 
Why do the Projects fail
Why do the Projects failWhy do the Projects fail
Why do the Projects failSwapanK
 
Software Requirement Elicitation Techniques http://www.imran.xyz
Software Requirement Elicitation Techniques http://www.imran.xyzSoftware Requirement Elicitation Techniques http://www.imran.xyz
Software Requirement Elicitation Techniques http://www.imran.xyzImran Hussain Khan
 
Chapter16For all types of project and in their different sizes, .docx
Chapter16For all types of project and in their different sizes, .docxChapter16For all types of project and in their different sizes, .docx
Chapter16For all types of project and in their different sizes, .docxchristinemaritza
 
Advanced Execution Concepts in Branch and Teller Capture
Advanced Execution Concepts in Branch and Teller CaptureAdvanced Execution Concepts in Branch and Teller Capture
Advanced Execution Concepts in Branch and Teller CaptureVivastream
 
Requirement Elicitation Techniques/Methods
Requirement Elicitation Techniques/MethodsRequirement Elicitation Techniques/Methods
Requirement Elicitation Techniques/MethodsSUFYAN SATTAR
 
Chapter Three Static Techniques
Chapter Three Static TechniquesChapter Three Static Techniques
Chapter Three Static Techniqueselvira munanda
 
Requirements validation - requirements engineering
Requirements validation - requirements engineeringRequirements validation - requirements engineering
Requirements validation - requirements engineeringRa'Fat Al-Msie'deen
 
Validating your-model
Validating your-modelValidating your-model
Validating your-modelGuy VdB
 
AUDITING TECHNIQUES AND INTERNAL AUDIT notes.pptx
AUDITING TECHNIQUES AND INTERNAL  AUDIT notes.pptxAUDITING TECHNIQUES AND INTERNAL  AUDIT notes.pptx
AUDITING TECHNIQUES AND INTERNAL AUDIT notes.pptxGoptiEmmanuel1
 
Tackling Barriers in Multi-Customer Contract Acceptance Testing (or Why Can't...
Tackling Barriers in Multi-Customer Contract Acceptance Testing (or Why Can't...Tackling Barriers in Multi-Customer Contract Acceptance Testing (or Why Can't...
Tackling Barriers in Multi-Customer Contract Acceptance Testing (or Why Can't...Maaret Pyhäjärvi
 
Fromscrumtokanbantowardlean
FromscrumtokanbantowardleanFromscrumtokanbantowardlean
FromscrumtokanbantowardleanLuca Aliberti
 
Choosing an alm tool set
Choosing an alm tool setChoosing an alm tool set
Choosing an alm tool setIan McDonald
 
SYSTEM LIFE CYCLE_DurgaPrasad_TA Assignemnt 02
SYSTEM LIFE CYCLE_DurgaPrasad_TA Assignemnt 02SYSTEM LIFE CYCLE_DurgaPrasad_TA Assignemnt 02
SYSTEM LIFE CYCLE_DurgaPrasad_TA Assignemnt 02Durga Prasad Mishra
 
OL_04-05_IPE 4111_ Project Selection.pptx
OL_04-05_IPE 4111_ Project Selection.pptxOL_04-05_IPE 4111_ Project Selection.pptx
OL_04-05_IPE 4111_ Project Selection.pptxSajibDas40
 
OL_04-05_IPE 4111_ Project Selection.pptx
OL_04-05_IPE 4111_ Project Selection.pptxOL_04-05_IPE 4111_ Project Selection.pptx
OL_04-05_IPE 4111_ Project Selection.pptxSajibDas40
 

Similar a Mazars Model Audit Methodology (20)

Model Audit
Model AuditModel Audit
Model Audit
 
MRM
MRMMRM
MRM
 
Qsm guidelines
Qsm guidelinesQsm guidelines
Qsm guidelines
 
Insights-Model-Validation
Insights-Model-ValidationInsights-Model-Validation
Insights-Model-Validation
 
Why do the Projects fail
Why do the Projects failWhy do the Projects fail
Why do the Projects fail
 
Software Requirement Elicitation Techniques http://www.imran.xyz
Software Requirement Elicitation Techniques http://www.imran.xyzSoftware Requirement Elicitation Techniques http://www.imran.xyz
Software Requirement Elicitation Techniques http://www.imran.xyz
 
Chapter16For all types of project and in their different sizes, .docx
Chapter16For all types of project and in their different sizes, .docxChapter16For all types of project and in their different sizes, .docx
Chapter16For all types of project and in their different sizes, .docx
 
Advanced Execution Concepts in Branch and Teller Capture
Advanced Execution Concepts in Branch and Teller CaptureAdvanced Execution Concepts in Branch and Teller Capture
Advanced Execution Concepts in Branch and Teller Capture
 
Requirement Elicitation Techniques/Methods
Requirement Elicitation Techniques/MethodsRequirement Elicitation Techniques/Methods
Requirement Elicitation Techniques/Methods
 
Chapter Three Static Techniques
Chapter Three Static TechniquesChapter Three Static Techniques
Chapter Three Static Techniques
 
Requirements validation - requirements engineering
Requirements validation - requirements engineeringRequirements validation - requirements engineering
Requirements validation - requirements engineering
 
Validating your-model
Validating your-modelValidating your-model
Validating your-model
 
AUDITING TECHNIQUES AND INTERNAL AUDIT notes.pptx
AUDITING TECHNIQUES AND INTERNAL  AUDIT notes.pptxAUDITING TECHNIQUES AND INTERNAL  AUDIT notes.pptx
AUDITING TECHNIQUES AND INTERNAL AUDIT notes.pptx
 
Tackling Barriers in Multi-Customer Contract Acceptance Testing (or Why Can't...
Tackling Barriers in Multi-Customer Contract Acceptance Testing (or Why Can't...Tackling Barriers in Multi-Customer Contract Acceptance Testing (or Why Can't...
Tackling Barriers in Multi-Customer Contract Acceptance Testing (or Why Can't...
 
Fromscrumtokanbantowardlean
FromscrumtokanbantowardleanFromscrumtokanbantowardlean
Fromscrumtokanbantowardlean
 
Choosing an alm tool set
Choosing an alm tool setChoosing an alm tool set
Choosing an alm tool set
 
Cost estimation
Cost estimationCost estimation
Cost estimation
 
SYSTEM LIFE CYCLE_DurgaPrasad_TA Assignemnt 02
SYSTEM LIFE CYCLE_DurgaPrasad_TA Assignemnt 02SYSTEM LIFE CYCLE_DurgaPrasad_TA Assignemnt 02
SYSTEM LIFE CYCLE_DurgaPrasad_TA Assignemnt 02
 
OL_04-05_IPE 4111_ Project Selection.pptx
OL_04-05_IPE 4111_ Project Selection.pptxOL_04-05_IPE 4111_ Project Selection.pptx
OL_04-05_IPE 4111_ Project Selection.pptx
 
OL_04-05_IPE 4111_ Project Selection.pptx
OL_04-05_IPE 4111_ Project Selection.pptxOL_04-05_IPE 4111_ Project Selection.pptx
OL_04-05_IPE 4111_ Project Selection.pptx
 

Último

India Economic Survey Complete for the year of 2022 to 2023
India Economic Survey Complete for the year of 2022 to 2023India Economic Survey Complete for the year of 2022 to 2023
India Economic Survey Complete for the year of 2022 to 2023SkillCircle
 
Stock Market Brief Deck for 3/22/2024.pdf
Stock Market Brief Deck for 3/22/2024.pdfStock Market Brief Deck for 3/22/2024.pdf
Stock Market Brief Deck for 3/22/2024.pdfMichael Silva
 
Slideshare - ONS Economic Forum Slidepack - 18 March 2024.pptx
Slideshare - ONS Economic Forum Slidepack - 18 March 2024.pptxSlideshare - ONS Economic Forum Slidepack - 18 March 2024.pptx
Slideshare - ONS Economic Forum Slidepack - 18 March 2024.pptxOffice for National Statistics
 
MARKET FAILURE SITUATION IN THE ECONOMY.
MARKET FAILURE SITUATION IN THE ECONOMY.MARKET FAILURE SITUATION IN THE ECONOMY.
MARKET FAILURE SITUATION IN THE ECONOMY.Arifa Saeed
 
ACCOUNTING FOR BUSINESS.II BRANCH ACCOUNTS NOTES
ACCOUNTING FOR BUSINESS.II BRANCH ACCOUNTS NOTESACCOUNTING FOR BUSINESS.II BRANCH ACCOUNTS NOTES
ACCOUNTING FOR BUSINESS.II BRANCH ACCOUNTS NOTESKumarJayaraman3
 
20240315 _E-Invoicing Digiteal. .pptx
20240315 _E-Invoicing Digiteal.    .pptx20240315 _E-Invoicing Digiteal.    .pptx
20240315 _E-Invoicing Digiteal. .pptxFinTech Belgium
 
20240314 Calibre March 2024 Investor Presentation (FINAL).pdf
20240314 Calibre March 2024 Investor Presentation (FINAL).pdf20240314 Calibre March 2024 Investor Presentation (FINAL).pdf
20240314 Calibre March 2024 Investor Presentation (FINAL).pdfAdnet Communications
 
Stock Market Brief Deck for March 19 2024.pdf
Stock Market Brief Deck for March 19 2024.pdfStock Market Brief Deck for March 19 2024.pdf
Stock Market Brief Deck for March 19 2024.pdfMichael Silva
 
Taipei, A Hidden Jewel in East Asia - PR Strategy for Tourism
Taipei, A Hidden Jewel in East Asia - PR Strategy for TourismTaipei, A Hidden Jewel in East Asia - PR Strategy for Tourism
Taipei, A Hidden Jewel in East Asia - PR Strategy for TourismBrian Lin
 
2024.03 Strategic Resources Presentation
2024.03 Strategic Resources Presentation2024.03 Strategic Resources Presentation
2024.03 Strategic Resources PresentationAdnet Communications
 
Hungarys economy made by Robert Miklos
Hungarys economy   made by Robert MiklosHungarys economy   made by Robert Miklos
Hungarys economy made by Robert Miklosbeduinpower135
 
LIC PRIVATISATION its a bane or boon.pptx
LIC PRIVATISATION its a bane or boon.pptxLIC PRIVATISATION its a bane or boon.pptx
LIC PRIVATISATION its a bane or boon.pptxsonamyadav7097
 
Contracts with Interdependent Preferences
Contracts with Interdependent PreferencesContracts with Interdependent Preferences
Contracts with Interdependent PreferencesGRAPE
 
What Key Factors Should Risk Officers Consider When Using Generative AI
What Key Factors Should Risk Officers Consider When Using Generative AIWhat Key Factors Should Risk Officers Consider When Using Generative AI
What Key Factors Should Risk Officers Consider When Using Generative AI360factors
 
Mphasis - Schwab Newsletter PDF - Sample 8707
Mphasis - Schwab Newsletter PDF - Sample 8707Mphasis - Schwab Newsletter PDF - Sample 8707
Mphasis - Schwab Newsletter PDF - Sample 8707harshan90
 
Work and Pensions report into UK corporate DB funding
Work and Pensions report into UK corporate DB fundingWork and Pensions report into UK corporate DB funding
Work and Pensions report into UK corporate DB fundingHenry Tapper
 
ACCOUNTING FOR BUSINESS.II DEPARTMENTAL ACCOUNTS.
ACCOUNTING FOR BUSINESS.II DEPARTMENTAL ACCOUNTS.ACCOUNTING FOR BUSINESS.II DEPARTMENTAL ACCOUNTS.
ACCOUNTING FOR BUSINESS.II DEPARTMENTAL ACCOUNTS.KumarJayaraman3
 

Último (20)

India Economic Survey Complete for the year of 2022 to 2023
India Economic Survey Complete for the year of 2022 to 2023India Economic Survey Complete for the year of 2022 to 2023
India Economic Survey Complete for the year of 2022 to 2023
 
Stock Market Brief Deck for 3/22/2024.pdf
Stock Market Brief Deck for 3/22/2024.pdfStock Market Brief Deck for 3/22/2024.pdf
Stock Market Brief Deck for 3/22/2024.pdf
 
Slideshare - ONS Economic Forum Slidepack - 18 March 2024.pptx
Slideshare - ONS Economic Forum Slidepack - 18 March 2024.pptxSlideshare - ONS Economic Forum Slidepack - 18 March 2024.pptx
Slideshare - ONS Economic Forum Slidepack - 18 March 2024.pptx
 
MARKET FAILURE SITUATION IN THE ECONOMY.
MARKET FAILURE SITUATION IN THE ECONOMY.MARKET FAILURE SITUATION IN THE ECONOMY.
MARKET FAILURE SITUATION IN THE ECONOMY.
 
ACCOUNTING FOR BUSINESS.II BRANCH ACCOUNTS NOTES
ACCOUNTING FOR BUSINESS.II BRANCH ACCOUNTS NOTESACCOUNTING FOR BUSINESS.II BRANCH ACCOUNTS NOTES
ACCOUNTING FOR BUSINESS.II BRANCH ACCOUNTS NOTES
 
20240315 _E-Invoicing Digiteal. .pptx
20240315 _E-Invoicing Digiteal.    .pptx20240315 _E-Invoicing Digiteal.    .pptx
20240315 _E-Invoicing Digiteal. .pptx
 
New Monthly Enterprises Survey. Issue 21. (01.2024) Ukrainian Business in War...
New Monthly Enterprises Survey. Issue 21. (01.2024) Ukrainian Business in War...New Monthly Enterprises Survey. Issue 21. (01.2024) Ukrainian Business in War...
New Monthly Enterprises Survey. Issue 21. (01.2024) Ukrainian Business in War...
 
20240314 Calibre March 2024 Investor Presentation (FINAL).pdf
20240314 Calibre March 2024 Investor Presentation (FINAL).pdf20240314 Calibre March 2024 Investor Presentation (FINAL).pdf
20240314 Calibre March 2024 Investor Presentation (FINAL).pdf
 
Stock Market Brief Deck for March 19 2024.pdf
Stock Market Brief Deck for March 19 2024.pdfStock Market Brief Deck for March 19 2024.pdf
Stock Market Brief Deck for March 19 2024.pdf
 
Taipei, A Hidden Jewel in East Asia - PR Strategy for Tourism
Taipei, A Hidden Jewel in East Asia - PR Strategy for TourismTaipei, A Hidden Jewel in East Asia - PR Strategy for Tourism
Taipei, A Hidden Jewel in East Asia - PR Strategy for Tourism
 
2024.03 Strategic Resources Presentation
2024.03 Strategic Resources Presentation2024.03 Strategic Resources Presentation
2024.03 Strategic Resources Presentation
 
Hungarys economy made by Robert Miklos
Hungarys economy   made by Robert MiklosHungarys economy   made by Robert Miklos
Hungarys economy made by Robert Miklos
 
LIC PRIVATISATION its a bane or boon.pptx
LIC PRIVATISATION its a bane or boon.pptxLIC PRIVATISATION its a bane or boon.pptx
LIC PRIVATISATION its a bane or boon.pptx
 
Contracts with Interdependent Preferences
Contracts with Interdependent PreferencesContracts with Interdependent Preferences
Contracts with Interdependent Preferences
 
What Key Factors Should Risk Officers Consider When Using Generative AI
What Key Factors Should Risk Officers Consider When Using Generative AIWhat Key Factors Should Risk Officers Consider When Using Generative AI
What Key Factors Should Risk Officers Consider When Using Generative AI
 
Mphasis - Schwab Newsletter PDF - Sample 8707
Mphasis - Schwab Newsletter PDF - Sample 8707Mphasis - Schwab Newsletter PDF - Sample 8707
Mphasis - Schwab Newsletter PDF - Sample 8707
 
Work and Pensions report into UK corporate DB funding
Work and Pensions report into UK corporate DB fundingWork and Pensions report into UK corporate DB funding
Work and Pensions report into UK corporate DB funding
 
Monthly Economic Monitoring of Ukraine No.230, March 2024
Monthly Economic Monitoring of Ukraine No.230, March 2024Monthly Economic Monitoring of Ukraine No.230, March 2024
Monthly Economic Monitoring of Ukraine No.230, March 2024
 
Commercial Bank Economic Capsule - March 2024
Commercial Bank Economic Capsule - March 2024Commercial Bank Economic Capsule - March 2024
Commercial Bank Economic Capsule - March 2024
 
ACCOUNTING FOR BUSINESS.II DEPARTMENTAL ACCOUNTS.
ACCOUNTING FOR BUSINESS.II DEPARTMENTAL ACCOUNTS.ACCOUNTING FOR BUSINESS.II DEPARTMENTAL ACCOUNTS.
ACCOUNTING FOR BUSINESS.II DEPARTMENTAL ACCOUNTS.
 

Mazars Model Audit Methodology

  • 1. A fresh approach The Model Audit Financial models are at the heart of major finance transactions. We believe the standard approach to auditing these models is flawed. Our fresh approach offers tangible benefits for both senior funders and shareholders.
  • 2. A flawed process A typical financial model audit carried out by an Documentation – what you don’t know can accountancy firm will consist of the following steps: hurt you • a review of model logic and calculations (including tax A key role of the auditor is to check the model to project and accounting compliance); and finance documents prior to financial close. The • a review of the model to supporting documentation; and following are typical failings: • a report on model issues. • key documents are produced late in the transaction, sometimes finalised only hours or minutes before close, These steps are performed iteratively, culminating in the a review is either then rushed or does not take place at all; production of an opinion letter confirming model integrity which is issued on financial close. • documents which are erroneously considered as not material, receive scant attention; Our experience, drawn from the practice of both auditing and being audited, combined with discussions with • this work is often undertaken by analysts with little shareholders and funders, reveals a level of dissatisfaction commercial experience and nuances which impact the with each stage of this typical process. robustness of an operational project company are missed. Model logic review – missing the unknown unknowns Reporting – more is less Model auditors typically check model logic in two ways: After each iteration of review, the model auditor will produce a list of issues for the attention of funders and the 1. They run spreadsheet mapping tools to check for model model builder. When we send off a bid model to an auditor consistency. which has been subject to internal review, we are often 2. They check the spreadsheet ‘cell-by-cell’, ticking as they surprised by the weight of the tomes received in return! go to confirm correctness. In nearly all cases, closer inspection reveals that no The first of these techniques, spreadsheet mapping, is commercially significant errors have been found. Instead, certainly necessary to checking the consistency of any comments consist of a combination of a download from complex spreadsheet. However, there can be a tendency whichever software package has been thrown at the model for over-reliance on this technique, and in some cases this and a list of general ‘observations’ which can be applied to is thought to be a sufficient test in itself. It must be any model review. While superficially a large audit report remembered that these tools only check for may suggest rigour, in reality it is more likely to reflect an consistency and poor referencing, they do not actually indiscriminate approach, lacking sufficient focus on analyse any logic. correcting commercially significant errors. The second of these techniques, ‘cell-by-cell’ review, is not Model opinion – ‘Insurance’ or ‘Assurance’ particularly satisfactory. As a typical model may contain In our view, there is an important problem with the way over 5,000 distinct and often complex formulas the task of that the role of the auditor is viewed. checking each is a daunting one. In reality, the main drawback to this sort of checking is that it is proven to be Funders typically view the opinion letter as providing far too boring for the human brain! Errors will be missed. insurance, believing the auditor will pick up the tab if errors Research has suggested that cell-by-cell reviews can be are subsequently found. Also, as an opinion letter is a expected to capture around 70% of errors. This is actually condition precedent for the credit agreement they also a fairly good success rate – but you may have sleepless tend to view the audit as an important piece of ‘admin’. nights considering the unknown 30%! The criteria for selecting an auditor then becomes a straight comparison of who will offer the highest ‘cover’ Another issue with the ‘cell-by-cell’ process is that it is time for the lowest price. consuming and therefore costly. There is no ‘short-cut’ in such a process which will enable an early view to be given The auditor is also very aware of potential liability and on model accuracy. This has historically meant that model funders requirements, and this may lead to them running reviews are only carried at the last possible moment and the following business model: offer the minimum liability that there has been no appetite to procure an independent caps required for market entry, reduce the costs of review at an early stage in the competitive process. This delivering the actual audit, employ a good lawyer to draft leads to the unfortunate position that commercially terms and conditions and finally, caveat his opinion as significant errors either jeopardise a project or the strongly as possible! consequences must be taken on the chin by shareholders.
  • 3. A fresh approach So far, we have looked at a number of areas where Scope of work – a stitch in time… the current model audit process might disappoint. There is a clear case for rethinking the scope of the More positively, here are some suggestions for auditor’s work. improvement. In the world of Competitive Dialogue, it becomes Methodology – it is rocket science! increasingly important for reliance to be placed on the In order to look for improvements to the standard financial model at an earlier stage of the transaction. ‘cell-by-cell’ approach it is useful to look to other Requesting some level of sign off from an independent industries. When NASA commissions its complex source as to model logic correctness should be a models and needs to be really sure its computations requirement of final tenders. This is not to say that a full are correct, it does not ask one firm to model and audit is required, but as has been outlined above an early another to audit. Instead, it will give the same job to consistency check can be carried out on which an two sets of developers and see if they come up with independent reviewer can give a letter of comfort. This the same answers. This rigorous approach would check need not be prohibitively expensive and, as the historically have been viewed as too expensive in the auditor is completing work which will be needed later if project finance market. the bid is successful, fee structures could be tailored to minimise cost impacts during the bid stage. However, the increasing prevalence of ‘template’ models and the standardisation of financial structures Also, a robust approach should be taken to the selection mean that it is now possible for an initial model of a of auditor and agreement to the detailed scope of work, relatively complex scheme to be constructed in a including: matter of hours. This opens the way for the ‘NASA • expectations for scope of document review; approach’ to be used in model audit. A commercially • timescales for reporting; astute auditor independently creates a shadow model • approach to sensitivity review; using project data inputs, the outputs of the shadow • details of the commercial experience of the analysts model are then compared to the model under test. who will be undertaking the review; and Any discrepancies can be fully interrogated, and the ‘errors’ in either shadow or test model corrected. • agreed processes for ensuring final auditor sign off of completed document review. This method has three very important advantages to the standard approach. Firstly, by challenging the On this last point, by ensuring that the auditor’s opinion analyst to create a replicated model you retain his letter is matched to the list of final documents, and interest – this is crucial to ensuring a job well done. making this an explicit condition precedent, many Secondly, the integrity of the review is clearly potential issues can be avoided. demonstrated; if the analyst achieves a different Finally, all parties should place the importance of ensuring answer, the discrepancy is clear – and it needs to be model correctness high on their priority list. While having explained. Thirdly, an early indication of the accuracy recourse to the auditor’s potential liability has a role in of the model under test can be given, this can be used ensuring rigour, it is in everyone’s interests that such to inform commercial decision making. remedy is never required. Mazars' fresh approach Mazars’ fresh approach offers tangible benefits when compared to standard offerings. • We are confident that our replication methodology is more robust – we offer a separate, not subordinate, liability to shareholders to demonstrate this. • We are prepared for the Competitive Dialogue process – we will undertake reviews prior to bid submission and on a contingent fee basis to ensure the robustness of your bid. • We tailor our scope of work to your requirements – you will find our fees are highly competitive when compared to standard offerings.
  • 4. Please get in touch. . . For more information on Mazars’ fresh approach to model audit, please contact: Bob Green T: +44 (0) 20 7220 3469 M: +44 (0) 7794 031 190 E: bob.green@mazars.co.uk Jerome Brice T: +44 (0) 20 7220 3386 M: +44 (0) 7794 031 163 E: jerome.brice@mazars.co.uk © Mazars LLP 2007 20911 Mazars LLP is the UK firm of Mazars, an international advisory and accountancy group, and is a limited liability partnership registered in England with registered number OC308299. Mazars LLP is registered by the Institute of Chartered Accountants in England & Wales to carry out company audit work. mazars.co.uk We have offices in Bedford, Birmingham, Brighton, Bristol, Dudley, Edinburgh, Glasgow, Huddersfield, Leeds, London, Luton, Manchester, Milton Keynes, Nottingham, Oxford, Poole, Southampton, and Sutton