Posted by: LYF | November 28, 2009

Q&A – When to write a narrative

Do you think you could maybe write a post where you give a brief example of a place you’ve taken what’s traditionally a checklist and used a narrative instead? What would the narrative look like?Kel

I don’t want to create the impression that checklists are awful.  The problem comes from using the same ones year after year.  If you don’t adapt them, then they won’t be addressing the particular risks of that year.  They may require enough work to form an audit opinion.  But you’ll either be doing too much work or not enough.  And if you take this approach it makes the planning section redundant.  Why are you identifying risks if you won’t be adapting your audit procedures from the prior year to address them?

It’s good to use a narrative when it will provide more relevant information than a checklist or when a paragraph would be easier to understand than a bunch of bullet points.

Most medium sized firms in Ontario use PEM.  PEM stands for professional engagement manual and includes a host of templates an accountant can use to perform an audit.  Here’s the template for Understanding the nature of the entity.  We have to fill that out for every audit client.

Take a quick look through it.  If you fill it out, you will know about the different components of a business and its environment.  But if you turn around and give it to a stranger, do you think they will understand the company?  Maybe?  When you’re doing a file you have to realize that other people are going to read it.  You should always keep that in mind.  It’s never a good idea to make someone else’s job harder by giving them something difficult to understand.  Especially when they have more authority than you.  Lucky for us PEM templates are the default.  So no one will get mad if they’re confusing.

This is why narratives are valuable.  They add clarity to a file while making you look smart.  You are fixing something no one really realizes is broken.  If I want to inject a considerable amount of awesome into my planning section I write a 2-page explanation of the business.  This doesn’t replace the form I noted above.  It reassembles its information into something I believe is much clearer.  I do the following,

1) Go to the company’s website and copy and paste what’s written in their “about” section.

2) Get a thorough understanding of their strategy – i.e. how do they plan to achieve their goals.

3) Take everything from the PEM form and put it into essay format.

I highly recommend the copy and paste approach.  Honestly, who’s going to describe the business better than the business itself? Understanding the company’s strategy may be a bit tougher.  Surprisingly, most don’t have one – budgets don’t count.  This step will require a few google searches and some conversations with the client.  The really tricky one is part 3.  This is like writing an English paper.  Throwing the facts from the template into a word document defeats the point of this exercise.  You will need to structure your paragraphs in such a way that they segue nicely into one another.

Your paragraph structure will depend on why you’re writing the narrative in the first place.  Are you trying to give context by providing a brief company history?  Are you trying to explain how the company works?  There are no wrong answers.  You’ll have to pick the purpose that makes sense to your file.

Always keep this purpose in mind.  Am I making my file easier to understand?  Is this approach more concise than a checklist?  Maybe you will include a map to show all the warehouses of a retail client or the properties of a junior mining company.  This is the “why.”  You will need a firm grasp on whatever that happens to be.  Otherwise, there’s no point in writing anything.

Never do, just to have something done.  When you’re finished, take a step back and ask yourself, “Does this actually add anything to my file?”

I hope that helps a bit.

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Responses

  1. Thanks for the post! It does help a lot, especially with the checklist form to compare it to :). Great explanation!

  2. great post again on the narratives stuff. agree 100%. it’s just like Shiller & Ackerlof talk about in Animal Spirits.

  3. […] Look at Last Year’s File […]

  4. Dude where are you man? I miss your POSTS! You and Krupo keep me entertained, COME BACK!

    • Yeah I know I’ve been slacking. I was in Spain for the past 9 days partying like a rockstar while trying to soak up what the country had to offer. You’ll see some posts soon!


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