In the dynamic world of audit and audit related services an often overlooked benefit is the risk assessment process. In the world of the Internal Auditor it’s not only used to create the annual audit plan; the risk assessment creates a flexible framework to identify the keys to achieving an organization’s success. The process to create the framework, if done properly, should help build consensus across organizations, enable executive management to make more informed decisions and foster greater cooperation on audits.

The complexity of risk assessments is tied to industry and Internal Audit department maturity. An established IA department in a heavily regulated or highly complex industry, like banking, may use more complex risk assessment processes and tools. To contrast, a recently formed IA department for a retailer could most likely execute the risk assessment using Word and Excel. In both cases the final results are the same; a risk based assessment of a company’s processes.

Executive management, as always, plays the pivotal role. Think of the framework as the picture of a company. Individual’s pictures vary depending on level and position and it’s the CAE’s responsiblility to co-development with management a picture that fits (on at least some level) into a picture that everyone can easily understand. This is the basis for communication regarding risk, controls, how the company’s strategy ties into the framework, and the risk assessment results. When executive management understands the risk assessment framework and process they are more likely to support audits of sensitive areas and in some cases, actually ask for audits for processes under their supervision.

Without sounding schizophrenic, I live in two different worlds.  No, I don’t have a secret Avatar life; but I do claim some expertise in two very different industries.  I lead valuation engagements for technology companies and wineries.  Sounds a bit strange, even as I write it, but it makes absolute sense to me.  Let’s take a look at the obvious differences before I enlighten you on the not so obvious similarities:

Differences

1. Assets – This may not be the most obvious difference to most, but to me it is the biggest difference between these two industries.  While a winery’s brand is at times its strongest and most valuable asset, a winery’s day to day focus is on real, tangible assets that someone can come in and count and touch with their own hands: cases and barrels of wine, land, machinery and equipment for crushing, pressing and storing wine and that old Ford truck the head wine maker drives.  A technology firm’s assets are much more intangible: software code, patents, that little “Intel Inside” logo on every computer.  A technology firm’s assets walk in and out the door every day and intellectual property is by far the biggest driver in this industry.
2. Owners – The wine business is one of the few remaining family generational industries.  The owners usually see their last name (or maiden name) on the product they sell and don’t venture too far off the family tree for investors or other owners.  Technology firms are rarely family owned.  They are mostly venture capital funded and ownership is shared among the entire employee base; everyone has skin in the game in most technology firms.  
3. Transparency – It seems like benchmarking in the wine industry is only done on the very rare occasion in broad and vague language by winery owners over a glass of cabernet at a charity auction.  Most wineries don’t know what their competitors are really doing in terms of sales, margins, spending by category or profitability.  In all honesty, I think that every winery would love to be able to benchmark themselves against others in their industry, but only under the condition that they don’t share their own information.  The technology industry embraces transparency and benchmarking because both facilitate the life blood of private and public capital investment.  For example, real and significant value is placed on audited financial statements when you need to file a prospectus with the SEC in order to do an IPO or a private placement memorandum.

Similarities

1. The People – Both industries, especially here in California, are home to some of the most passionate and brightest business men and women our country has to offer.  A good percentage of the world’s best wine is made within a 30 mile radius of my office in St. Helena, California.  And some of the greatest entrepreneurs the world has ever seen live and work within a 30 mile radius of our firm’s headquarters in Palo Alto, California.  Northern California hasn’t cornered the market on passion in the workplace but it is surely a common denominator for successful firms in both the wine and technology industries.
2. Consumer Focus – Yes, this one may seem simple but people who buy iPods also buy a Napa Valley Cabernet Sauvignon.  The focus of both industries is the end consumer and creating and enhancing a lifestyle that is both technologically savvy and appreciative of the good things in life.  While the wine industry has been slower to embrace technology, the overlaps between these two industries is becoming clearer with the use of social networking and the slow embrace of software tools like CRM (Customer Relationship Management) software.
3. Zero Revenue Models – This one isn’t so obvious.  However, during my professional life in both worlds, I see a strong similarity between startup wineries and technology firms.  Both have very similar characteristics with respect funding early stage losses for long-term gains.  A piece of unplanted land in Napa Valley has similar business model hurdles to a life science startup in Silicon Valley.  The only difference is that the investment for the winery is in tangible assets (planting vines, building a winery and tasting room) while the life science startup invests in people in the form of research and development, usually out of a sublet, non-descript commercial office.  Both business models require patience (it can take up to seven years, depending on the varietal, to see any revenue from newly planted vines) and regulatory hurdles (there is about a 10% probability of getting a drug from clinical testing to FDA approval).

So, where do all these differences and similarities get us to?  Good question.  We believe that the answer is in the form of our new blog; Crushing It!  Derek Groff (who also lives in both worlds) will take command of a new blog over the next month that tackles some of the following topics:

1. Stock Option Plans – Do they make sense in the wine industry?
2. Virtual Wineries – How do they work and why is it the right path for some winemakers?
3. Technology – Will the industry embrace technologies that can improve the quality of wine, reduce a carbon footprint and enhance processes and controls?
4. Winery Valuations – What are wineries worth?  What are the impacts on generational transfers?  What drives value?
5. Alternative Sources of Capital – In an industry dominated by family-run businesses, how do wineries obtain capital in the form of private or public equity and alternative forms of debt?
6. Benchmarking – Yup, we’ll try to tackle this one with some interesting observations and well-thought out suggestions.

Sound good?  Tune in here soon for Crushing It!

Communication skills are dynamic and in the business environment they are very difficult to measure and are often undervalued. Effective communication not only minimizes time, cost and workflow, it also leads to increased client satisfaction. Communication includes tone, style, and format and is most often the determining factor in failed audits. Here is the problem; people communicate differently from one another and often times are polar opposites. Below are a few thoughts on communication protocols and communication styles.

A strong service delivery methodology lays the foundation for an audit team to communicate consistently and effectively across all engagements. Key steps that include a scope meeting and standardized documents like the scope memo create structure and are tools of communication between the audit team and business owners. For example at an audit’s inception the audit objectives, high-level procedures, and deliverables are documented and agreed upon. With a clear understanding held by both the audit team and the business owners the likelihood of the audit succeeding is vastly improved.

Communication style includes format and tone and is the second key to executing audits, especially Internal Audit audits. In most instances a formal report is written and presented to executive management, the BOD and possibly the actual business owners. However, at each level there is a different style of communication with varying amounts of detail. For example, typically during the course of an audit smaller findings are not included in the formal report. These informal findings often times are communicated verbally to the business owner, but not necessarily to executive management and probably never to the BOD.

Be careful with Email! Email is not the preferred method to communicate issues, especially technical issues. First, let’s not confuse email with a formal written report. The processes to write an email compared to an audit report is the difference between making a paper airplane and a real one. Emails are also more difficult to control. I don’t know how many times I’ve seen simple issues turn into catastrophes because either an email was written in haste or misunderstood. Often times it was a combination of both. As an auditor a little courage must be exercised to pick up the phone or conduct a meeting to discuss issues face to face.

Without the proper protocols or effective means of communication Internal Audit projects can become painful experiences for both the auditee and the auditor. With them, sucess is more likely and easier to achieve.