First: Know Your Market

If you havent learned how to identify customers information needs, youre not ready to provide new assurance services. Why? Because those assurance services that meet customers needs will sell; those that do not will fail. Traditional audit services cannot be expected to expand your practice; they are no longer growth areas. Therefore, the profession has no alternative but to fashion new services that bridge customers needs and CPAs competencies. However, no bridging can take place without understanding customers needs.

WHO ARE THE CUSTOMERS?
The potential customers are people who use information to make decisions. They could be senior managers or other employees, members of corporate or not-for-profit boards, institutional investors, financial analysts, individual investors, creditors, charitable donors and individuals who make decisions about matters such as selecting personal medical care or arranging care for elderly family members.

Assurance services are defined as independent professional services that improve the quality of information, or its context, for decision makers. If the assurer does not improve the decision-making information, the service does not qualify as an assurance engagement. So the key criterion identifying the customer for an assurance service is that he or she is the party who can benefit from improved decision-making information.

However, the customer is not necessarily the party who pays for the assurance service. For example, in a financial statement audit, the decision maker is the investor or creditor who uses the financial statements or, in the case of not-for-profits or governmental units, the decision maker is the donor or taxpayer. But it is the client who prepares the financial statements, deals with the auditor and pays the fee.

Focusing on the customer is a fundamental business concern. The decision-making users of information create demand for assurance services; their needs dictate engagement possibilities.

HOW TO IDENTIFY CUSTOMERS ASSURANCE NEEDS
The first requisite for CPAs is a customer-focused mindset. This includes not only understanding who the customer is but also making a commitment to learn the customers information needs, being alert to all kinds of information that could illuminate those needs and constantly striving to learn more about them.

Existing clients—because of the established service relationship—offer the best opportunity to learn more about their information needs in order to create a new service. In addition, because clients trust them, CPAs have a marketing advantage with their clients.

CPAs can use three basic techniques to identify clients information needs. They can ask them individually, take surveys and hold discussion groups.

1. Asking clients what they need can be a regular procedure. Good communications are always a plus, and clients appreciate learning how their accounting firms can help them.
2. A questionnaire delivered to a sample of clients with the objective of learning about them provides data helpful in making decisions about potential services.
3. A formal focus group, with a two-way mirror, a facilitator and videotapes, can be costly, but gathering some clients together to discuss service needs allows interaction and delivers more information than can be gained from a questionnaire. It also creates goodwill.

The American Institute of CPAs special committee on assurance services created a questionnaire to learn clients information needs, which was published in the July 1996 Journal of Accountancy and is available at www.aicpa.org/assurance/scas/comstud/icn/index.htm. The special committee also interviewed a spectrum of decision makers to learn their needs for decision-making information. The interviewees included members of corporate boards, investors, creditors, managers, regulators, members of government and university administrators.

Despite their diversity, they generally wanted the same thing: more information on the risks they faced, information on entity performance to see whether goals were being achieved and information on the quality of the systems they used. Three of the services developed by the special committee address these needs (risk assessment, performance measures and systems reliability). The interview findings are presented in full on the special committees Web site (http://www.aicpa.org/assurance/scas/comstud/analy/index.htm).

No matter what technique is used to inquire directly of customers needs, the CPA must bring to the task an understanding of the clients business and industry, including the clients business objectives, markets and dependencies on suppliers. This knowledge is essential to interpret and corroborate responses to questions and volunteered ideas.

Clients information and assurance needs will never be fully stated. The CPA has to uncover additional needs by understanding the decision makers problems and how those problems are influenced by major trends. The special committee used this technique to identify several services. The need for ElderCare-Plus, which was described in last months article, was identified from analyzing such trends.

The AICPA assurance services committee will be using trend analysis in its work on service identification, but firms should apply the technique when they explore the new services as well. The special committees analysis of trends, including many new assurance opportunities, is available at http://www.aicpa.org/assurance/scas/comstud/mega/index.htm. It is helpful to conceive of the exercise as strategic thinking, trying to understand where the marketplace is going, what forces are influencing the service needs of clients and potential clients and whether the firm can provide the services. The three following methods, used singly or in combination, can help CPAs gather the information to identify new assurance needs.

USING BUSINESS MODELS TO IDENTIFY NEW SERVICES
A CPA may find a reliable and comprehensive business model instrumental in identifying which new services customers need. A model can be used to identify important information flows about which decisions have to be made and where services are needed to improve the quality of the information—in other words, what assurance services are needed. The model shown in exhibit 1, “Business Model for an Enterprises External Information Flows,” illustrates typical external information flows.

Companies do business in four marketplaces: those for supplies (of goods, services and technologies), customers, capital and talent. In each instance, the enterprise conducts transactions (for example, raw materials purchases, sales of goods and services, sale of capital stock and hiring). And in each instance, the decisions about the transactions are supported by two-way information flows. The arrows illustrate these flows. In addition, the company has relationships as a member of its community: Information flows to and from community agencies are necessary when decisions have to be made about accountability and regulatory relationships (for example, factory location and compliance with regulations).

The arrows represent information flows. When dealing with a specific client, the practitioner would identify the specific information and then determine whether the client needed services that could improve the quality of the information.

Exhibit 1 also shows how CPAs have channeled their information improvement services in the past and how a broader view is achieved. Arrow 1 (the black arrow) shows the information flow CPAs have been most involved with through the audits of financial statements. Obviously, many other information flows are needed for entity decision making, as the other arrows in the figure demonstrate. However, even on the black arrow there are possibilities for new services beyond financial statements, for example, nonfinancial information such as operating statistics. Today there are many other information flows to investors and creditors. Exhibit 2, illustrates the range of information flows represented by the numbered arrows in exhibit 1. Each of these types of information might benefit from assurance services.

USING BUSINESS STRATEGIES TO IDENTIFY NEW SERVICES
A CPAs knowledge of corporate strategy is useful in identifying information needed for decisions and, thus, new assurance services. Companies need to know how well they are fulfilling their strategies in order to evaluate the strategies and the processes used to achieve them. Enterprises therefore need to employ a variety of performance measures.

Exhibit 3, “Deriving Measures From a Companys Vision,” illustrates a generic strategic vision that encompasses four measurement perspectives, which correspond to the balanced scorecard devised by Robert S. Kaplan and David P. Norton. (Also see JofA, Jan.97, “A Smarter Way to Run a Business.” ) The four perspectives cover the full breadth of what is needed to achieve a companys vision; financial measurements alone cannot achieve this.

The questions to the left lead to objectives and goals on the right that support the vision. If the goal, for example, is to be rated number one by customers, the measurement of on-time delivery and responsiveness is essential. Similarly, two objectives of the internal perspective are short cycle times and speed to market, and their measurement would be important to decision makers. Supplier defect rates also would be of interest in evaluating internal processes, as would classic scrap and rework data. Finally, important objectives in organizational learning (the companys ability to create and exploit new knowledge) include improving core competencies and reaching a high percentage of sales from new products—which is a measurement of the ability to commercialize new products. Measurements of both would be important to decision makers.

Each company is unique in its vision, objectives, customer base and internal processes. A business model analysis therefore requires a deep understanding of the company, the business and the industry. The development of appropriate measures is itself an assurance service, as is the evaluation of performance measures. (See the sidebar, “New Assurance Service: Business Performance Measures.”)

USING DECISION MODELS TO IDENTIFY SERVICES
A focus on customers—that is, decision makers—centers attention on their decision-making processes. Decision making often seems to follow a deceptively simple pattern of input information/output decision. However, the routineness of decision making has hidden the number and complexity of the processes. Closer analysis shows there are several components to the process, and each presents an opportunity for developing new services that serve decision makers. The better assurers understand decision-making processes, the easier it will be for them to identify additional assurance services. Exhibit 4, “Users Decision-Making Processes,” shows an eight-step model. It is described in detail at http://www.aicpa.org/assurance/scas/comstud/relevnce/index.htm.

Sometimes familiar business problems have been around so long the definition of the problem (the first step in the illustrated model) is not considered a part of managements decision making. For example, a company sells widgets in its retail showrooms. It has always hired low-wage “order takers” to pick widgets off the shelf and ring up purchases. The company has not rethought the problem of how best to sell its widgets for many years. In the meantime, widgets have become more complex and customers need increasing help to understand their features and the advantages of the companys widgets. The company might define the problem as how to upgrade the capabilities of its sales personnel, or it might define the problem as how to install the most cost-effective computerized demo kiosks in its stores, or it might define the problem more generally. These alternatives would lead to new information requirements (for example, salaries for technical personnel and costs of developing and maintaining computerized demo stations). Working through the entire problem—including all the steps in exhibit 4—offers the CPA many opportunities to assist the client in refining its decision-making processes and information requirements.

RELEVANCE-ENHANCEMENT SERVICES—
SUPPORT FOR GOALS
Improving the quality of information needed for decision making will take the assurer more directly into “relevance-enhancement assurance services.” These are services to help clients determine the right types of information to achieve their business objectives and then develop systems and processes to continuously provide the information. If the assurer helped define the problem, construct the decision model and name its information requirements for any given decision, each of these three steps would be a relevance-enhancement service. The information needed to define the problem would be based on the decision makers objectives and relevant in that sense.

Performance measurement services, as described in the sidebar, illustrate relevance-enhancement services. One such service is assessing the relevance of an entitys performance measures and informing management about how well the performance measures support achievement of the companys goals. Another such service is identifying new performance measures to help the entity meet its performance goals.

RELATING SERVICES TO CLIENTELE
Not every newly identified service will suit every firms clientele, and some will not be suitable at all. For example, ElderCare-Plus shows greater promise when a firm has direct service relationships with individuals (for example, tax or personal financial planning clients). Electronic-commerce assurance services best suit a clientele that is engaged in electronic commerce or likely to be in the near future. The assurance services committee will be identifying services in the near future. Over 200 services were identified by the special committees survey of 21 firms (see box, “A Sample of Assurance Service Possibilities”).

To successfully match service characteristics to clientele characteristics requires a clear understanding of both the service and the clientele. The CPA should understand what party will use the information that is the subject of the potential engagement, the services value to the user and, if the payer is different, the services value to the payer. Understanding the clientele means knowing the business and industry of each client. Many firms specialize in certain niche industries or clients of a particular size. Data about clients are readily available. Firms must decide how much they should collect and what forms of analysis they need.

Understanding the marketplace, focusing on the customer and identifying potential services are the beginning, but not the end, of orderly service expansion. Firms also must determine whether potential services suit their competencies, risk tolerance and desired image in the community. The committees findings and suggestions on this subject will be taken up in the next article in this series.