Thriving On Change

The internal auditor's role in mergers and acquisitions.

  • AS MERGERS AND ACQUISITIONS REDUCE the number of commercial banks, internal auditors who work for these institutions can make contributions to ease these transactions by providing management with vital information about the company being acquired and the merger process.

  • WHEN NATIONSBANK MERGED WITH BOATMEN'S Bank in 1997, NationsBank's internal auditors were able to generate a number of savings opportunities by leveraging existing audit resources to avoid costly consulting fees, identifying potential problems and preventing unnecessary expenditures.

  • USING EXPERIENCE GAINED IN PREVIOUS MERGERS, the NationsBank internal audit department also made other contributions that eased the transition or saved time. In addition, they served as goodwill ambassadors to Boatmen's employees, easing their fears about the coming merger.

  • WORKING CLOSELY WITH NATIONSBANK'S STABILITY team, the internal auditors helped document how normal operations would be maintained during the merger. The auditors also assisted transition teams and line-of-business managers in implementing internal controls and assessed the control aspects of major changes resulting from the merger.

  • THE INTERNAL AUDIT DEPARTMENT HELPED TO KEEP NationsBank's operations running smoothly during the merger. This, in turn, minimized the bank's financial loss due to customer account or employee turnover.
    JOHN TRAMPE, CPA, CIA, is a senior vice-president with NationsBank in Dallas. He is a past president of the Dallas chapter of the Institute of Internal Auditors.

    M ergers and acquisitions are a way of life in today's commercial banking industry. They were partly responsible for the number of banks declining from approximately 14,500 in 1984 to about 9,200 as of September 1997. In the last few years, merger activity among the nation's largest banks has intensified, with numerous multi-billion-dollar deals announced since the beginning of 1995—more than ever before. Given the unique challenges such mergers and acquisitions present, management should understand how the internal auditors who already work for them can play a vital role in facilitating these transactions by saving time and money. This article tells the story of how the internal auditors at one bank did so in a recent merger.

    The internal auditors' role in bank mergers and acquisitions usually is associated with the due-diligence process. Auditors can provide senior management with vital information about the value of the company being acquired, its financial condition, any weaknesses in its financing or internal controls as well as its history, customer base, property conditions and management practices. Frequently, however, when two large, well-established companies decide to merge, the due-diligence process is less important than expected by internal auditors who have never been involved in a merger. Because senior management already has decided the merger makes strategic sense, due diligence is more of a fact-finding mission than a critical step in the decision-making process.

    Due diligence is only one aspect of the services an internal audit department can—and should—perform in a bank acquisition. Once the transaction is announced, the acquiring bank forms a team to begin the transition. Frequently, internal auditors are overlooked as players on that team. Management often sees them only as fact checkers and not as a source of important new information. This is not the case. Because internal auditors already have in-depth knowledge of the operations and employees in every important area of the acquiring company, they can be extremely valuable as key advisers to senior management throughout the process, resulting in both calculable and incalculable savings.

    If management does not automatically involve its internal auditors, they should take the lead and prepare a proposal of work they can perform during the transition and then review that plan with management. Auditors who have no such experience should focus their planning efforts on mitigating operational and financial risk, retaining customers and reducing expenses during the transition period. At NationsBank, the results of work the internal auditors had performed in previous mergers were reviewed and enhancements made for the new merger plans, incorporating lessons learned from past experiences.

    Despite the positive experience NationsBank has had involving its internal auditors in the merger process, managements at other companies may still balk, fearing the auditors will get in the way or won't have the skills needed to add value during the transaction. To become part of the merger team, internal auditors may have to play a more nontraditional role. The NationsBank auditors helped anticipate what might go wrong during the merger, participated on teams to clean up problem areas and pointed out lessons from previous mergers. As a general rule, internal auditors should try to get involved in the merger process as early as possible and begin adding value so management recognizes them as valuable team members.

    NationsBank has had a number of large acquisitions in its history and the internal audit department has played a significant role in the larger mergers since 1989. Originally, it was the department's managers who proposed to the bank's senior management that they could make a contribution during the merger transition process. It didn't make sense for the department to perform traditional audits during that period, since systems and procedures would change significantly. With the traditional audit schedule suspended, it made more sense for the auditors to perform work that could reap real benefits for the bank.

    In the Boatmen's merger, most of the calculable savings came from leveraging existing audit resources to avoid costly consulting fees, identify potential problems and prevent unnecessary expenditures as the two entities merged. Here are some examples of what the internal auditors did.

    • Reduced consulting fees . Because NationsBank's internal auditors had many of the same skills as consultants—excellent personal computer and project management skills as well as the ability to advise management on improving controls and process flows—there was little need to hire outsiders.

    • Reduced external audit fees . Like consulting fees, external audit fees typically increase when a merger occurs. But with proper communication, coordination and planning, NationsBank's internal auditors were able to do much of the external auditor's work, reducing the bank's need to rely on expanded external audit services.

    • Enhanced customer retention . Due to the nature of their jobs, internal auditors understand the bank's transaction flow and how it affects customers. As a result, NationsBank's internal auditors helped management evaluate how customers would be affected by changes in products and services, such as different checking and savings account options or the availability of PC and telephone banking services, helping the bank minimize the loss of customers.

    • Identified back-office inefficiency and mitigated risk . As back-office procedures changed and new processes were introduced, NationsBank's internal auditors worked closely with the transition teams in various departments to identify inefficient processes and implement best practices. The auditors monitored key indicators on a weekly basis so management could identify problems promptly—particularly in areas affecting customer service.

    • Reduced internal and external fraud . Internal auditors typically monitor exceptions and trends to help them identify potential fraud. During the merger, especially during the transition period, NationsBank's internal auditors continued to monitor controls to spot potential fraud—such controls can easily be compromised during a period of significant change.

    In addition to generating identifiable savings, the internal audit department also proved its value in incalculable ways, by easing the transition or saving time. The internal audit team used the benefits of their experiences in previous acquisitions and served as goodwill ambassadors to Boatmen's employees. NationsBank had undergone a number of mergers in recent years—all with the internal audit department's help. It was not unusual for the department to handle overlapping mergers since some were being finalized as others were initiated.

    From August 1996 until the Boatmen's deal was final in January 1997, NationsBank's internal audit department personnel—along with the Boatman's internal auditors—performed several valuable tasks. They

    • Assessed Boatmen's existing control environment.

    • Compiled a list of issues from prior-year internal audit reports to help management identify potential areas of vulnerability.

    • Interviewed Boatmen's external auditors to get their historical perspectives and help with identifying areas of higher risk.

    • Formed a cross-functional risk management team to ensure significant risks would be addressed during the transition.

    • Reviewed Boatmen's loss experience, audit reports and major operations units for stability.

    Eventually, NationsBank's internal audit department found its role shifting from a traditional one of assessing the adequacy of existing controls to that of a management adviser charged with developing new process flows and controls in the redesigned operation as well as gathering and reporting key performance information and monitoring operations stability during the transition. Simply put, the department's role was to inform management quickly if it discovered something awry so management could address it promptly.

    As plans for the merger progressed, the internal auditors also partnered with management's stability team, which was responsible for developing and implementing the bank's stability plan. Such plans document how normal operations would be maintained should something go wrong during the transition (the departure of key employees or if redesigned transaction flows did not result in optimum customer service). The stability team, for example, made sure a centralized customer service center had properly trained staff and the technology necessary to handle increased customer call volume on a timely basis. In a merger, transition timetables are often aggressive, but if key performance indicators (KPIs) are properly installed and monitored, auditors can alert management to concerns before they become major problems.

    The NationsBank internal auditors worked closely with management to identify KPIs management considered important in monitoring the operational performance of the units they supervised. Management provided the internal audit team with the KPIs on a weekly basis. The auditors then prepared a written report to transition management assessing the operational stability of critical units affected by the merger.

    While KPIs generally are operational in nature, in the Boatmen's merger financial indicators, such as reconciliation of clearing and suspense accounts, also were monitored to avoid financial losses. Among the KPIs auditors monitored in the customer service area were how quickly calls were answered and the number of calls abandoned (hang ups). Both auditors and management reviewed those numbers daily to ensure the new operation was providing quality customer service.

    As part of the Boatmen's stability plan, each line of business was held accountable for stability in its area. As backup, the stability team made sure each line of business had a contingency plan. The internal auditors helped transition teams and line-of-business managers implement internal controls and assessed the control aspects of the major changes resulting from the merger. Finally, the auditors helped install the KPIs throughout the newly redesigned NationsBank to measure operational unit performance.

    The audit team that worked on the Boatmen's acquisition swiftly put KPIs in place in every area of the company to help management keep tabs on staffing levels, turnover, reconciliations, production deadlines, back-office exception levels and call center abandonment rates. Ideally, in a transaction such as this one, KPIs would be gathered for a minimum of 60 days before one of the company's business units was closed or relocated. For example, when Boatmen's Kansas City back-office operations were converted and consolidated, the internal audit department analyzed the conversion and assimilation into other units. It provided pre- (operational readiness) and post- (transition cleanup) consolidation reviews of the areas that received increased volume.

    Once the merger was announced, many Boatmen's employees started looking for new jobs because their positions duplicated existing ones or because they did not want to remain as part of the changing or changed organization. The NationsBank internal auditors, among the first on the scene to perform stability and control assessment reviews, became goodwill ambassadors—welcoming Boatmen's associates and trying to alleviate possible anxieties by persuading them there would be many opportunities for them to remain with NationsBank.

    Besides working to ensure stability, the NationsBank internal audit department was responsible for auditing other consolidations and conversions, ranging from combining reconciliations/processing sites to computer system conversions. Because reconciliations must be performed daily and timely transaction processing (such as loan requests) is critical in a merger such as this one, turnover or inadequate testing and training could create a backlog, leading to customer dissatisfaction or financial loss. The computer system that stored customer account information and financial records had to be evaluated and integrated with or converted to the target systems—those selected to survive the merger. The auditors evaluated tests to ensure system conversions would go smoothly and that the system—and the employees—could manage the stress of added volume. New system interfaces were developed and tested as well. NationsBank held dress rehearsals to make sure the system integrations or conversions would be transparent to customers and that employees were prepared to deal with customers and transaction flows in the new environment.

    While it is difficult to estimate the value of these services to NationsBank, the internal audit department's activities certainly helped management keep operations running smoothly. This, in turn, minimized the money lost due to customer account or employee turnover.

    There is no question that internal auditors can and should take a very active role in mergers and acquisitions. Big or small, an acquisition is a key event for any company. There is no better time for a company to let the auditors demonstrate how they can add value and improve or maintain the company's bottom line. In the environment of change and uncertainty that exists during a merger, internal auditors have the skills necessary to help their employers reap the substantial rewards the merger transaction was intended to yield.


    Get your clients ready for tax season

    Upon its enactment in March, the American Rescue Plan Act (ARPA) introduced many new tax changes, some of which retroactively affected 2020 returns. Making the right moves now can help you mitigate any surprises heading into 2022.


    Black CPA Centennial, 1921–2021

    With 2021 marking the 100th anniversary of the first Black licensed CPA in the United States, a yearlong campaign kicked off to recognize the nation’s Black CPAs and encourage greater progress in diversity, inclusion, and equity in the CPA profession.