Dehi Business Review X Vo. 4, No. 2, Juy - December 2003 CONTRIBUTION OF INTERNAL AUDITING IN THE VALUE OF A NURSING UNIT WITHIN THREE YEARS John N.. Var arvatsouakis atsouakis DURING the present time, interna auditing is witnessing a rapid deveopment because of concrete changes and bizarre tendencies in the enterprising environment. In the present artice an attempt has been made to study the scientific assessment of financia resuts spawned by interna auditing in the vaue of a nursing unit. For the assessment of the financia resuts (a) we foowed a ine of hypothesis, (b) we used economic figures, which were received by the pubished financia statements of a Greek private maternity cinic for the period between 31/12/1997 to 31/12/2000 and c) we used economic figures that were coected from the corresponding department of interna auditing. From the comparison of individua cases we reaize that according to hypothesis that were foowed it appears that the interna auditing had financia profits for the scrutinised Greek private maternity cinic. From the anaysis criticay appied on the financia figures of the company and in concordance with the hypotheses aid out of hypotheses it appears that its vaue was increased during a period of three years at a sum varying between 0.4 and 1.6 miions of Euros or in percentage increase between 10% and 36%. Genera In our days interna auditing faces a rapid deveopment because of concrete changes and tendencies in the enterprise environment (Moore, 1999, Oxner, 1998, Kuse, 1996, Oxner, 1994, Kapan, 1995, Cashin, 1986, Meigs, 1984, Brink, 1958): The rapid growth and the compexity of basic operations of enterprise - The growth of modern organisationa units has caused various probems in their management. Modern management faces more eves in the organizationa structure of enterprise and finay communication is one of the most important probems in the modern enterprises. Interna auditing can substantiay faciitate the intercommunication of various eves of hierarchy. The internationaization of markets and the dissemination of activities in wider geographic regions During the first midde of 20 th century most enterprises were usuay operating in a cose geographic region. The gobaization of markets and the existence of various seductive enterprising occasions have ed the enterprises to expand their activities to other regions. The tendency for decentraizing management Many of companies have reaized that the mode of centraized management, which was appied to a arge extent in the past, have ed to decining resuts. These companies have begun to adopt the mode of decentraizing management. The rapid growth of mergers and acquisitions The effort of enterprises to achieve economies of scae can expain the rapid growth of mergers and acquisitions. This business practice has caused important changes in the structure of invoved enterprises. The rapid growth of technoogy The rapid growth of technoogy has caused the appearance of important changes in the business environment, the rapid growth of voume of transactions, the growth of new forms of enterprising action and the deveopment of new products. The enterprises face new chaenges and new risks that were unknown in the past. 95
John N. Varvatsouakis According to the atest definition of the Institute of Interna Auditors interna auditing is an independent, objective assurance and consuting activity designed to add vaue and improve an organization s operations. It heps an organization accompish its objectives by bringing a systematic, discipined approach to evauate and improve the effectiveness of risk management, audit, and governance processes (institute for interna auditors, 1999). In the present artice becomes an effort of scientific assessment of financia resuts from interna auditing in the vaue of a nursing unit. For the assessment of the financia resuts a) we foowed a ine of hypotheses b) we used economic figures, which were coected from the pubished financia statements of a Greek private maternity cinic for the period between 31/12/1997 to 31/12/2000 and c) we used economic figures that were coected from the corresponding department of interna auditing. Financia resuts from the interna auditing The operationa audits constitute the more important percentage of audits of the department of interna auditing. During the operationa audits important matters, were reaized which infuenced the income, and aso the costs of maternity cinic. The contribution of the department of interna auditing in the increase of income and aso in the reduction of cost was important. The interna auditor with the coaboration of persons in charge of departments and with the submission of reative proposas to the administration for change in the existing processes and in the productive operation, contributed to the achievement of financia profits in the economic sizes of the maternity cinic. The most important financia profits from the reaization of operationa audits are the foowing: a) Restriction of oss of income An important part of the income of hospitas, and aso the important source of cost, constitutes the sanitary materia that is spent in the interventions and in the hospitaization of patients. With the narrow foow-up of process of debit of sanitary materia in the accounts of patients and the continuous sensitization of personne for the consequences of not debit of sanitary materias in the economic resuts of maternity cinic, the oss of income was imited. The submission of reative report about the audit findings, to the administration had given a serious awakening to nursing personne and at the same time with the hep of audits and the change of certain processes this divergence was imited by 17% as in 1998, which was hardy 2% is 1999. This rate of reduction of divergence of income at 15% meant rea financia income for the company. b) Restriction of cost of production The restriction of cost of productive process is a point, by which wi be judged in future the hard competition between the private nursing units. The reveation by the department of interna auditing of counterproductive use of resources of diagnostic aboratory, ed to rearrangement of productive process resuting the company profits totay to a sum of 100 thousands of Euros. c) Creation of mixed deegates of evauation suppy of burnabe materias and medica equipments. The creation of deegates of evauation - suppy of burnabe materias and medica equipment, in that participated the members of the Board of Directors (the creation of such deegates was incuded in the interna drawing of organization of the company and is conformed with the basic principes of equitabe management and interna auditing), heped the administration in the achievement of efficient economicay sound agreements and in the saving of money at the negotiations of these deegates of a tota sum 152 thousands of Euros. Consequenty we see that from interna auditing savings totaing to approximatey 432 thousand Euros were aterted. The assessment of financia resuts in the vaue of the company For the assessment of financia resuts of interna auditing in the vaue of company we wi use the mode of discounted net cash fows with succincty runs as under: Vaue of enterprise = NPV NCF. + Residua vaue + Vaue of non operationa assets 96
Dehi Business Review X Vo. 4, No. 2, Juy - December 2003 With regard to the individua eements of this mode we can observe the foowing: Cacuation of the Net Present Vaue of the Net Cash Fows (NPV NCF) The method of discounted net cash fows is based on the perception that the investor is not interested so much for the accounting profits of enterprise (the difference of income - expenses), as much as for the financia surpus that the enterprise creates and it is possibe for him to coect the or they can be reinvested aso in the enterprise, and increase in future vaue of the company. The Net Present Vaue of the Net Cash Fows (NPV NCF) is cacuated as foows T NPV NCF = Σ [NCF / (1 + i) t ] t = 1 where NCF = Net Cash Fows = Profits pre taxes Tax of Income + Depreciation I = the discounting interest-rate of Net Cash Fows = i RISK-FREE + i RISK For the cacuation of the Net Present Vaue of the Net Cash Fows we wi foow the foowing stages: Cacuation of Net Cash Fows (NCF) The annua Net Cash Fows of enterprise counterbaance the annua profits before taxes minus the income tax pus the depreciation. The rea Net Cash Fows have incorporated the financia profits from the interna auditing, which were about 432 thousands Euros. Because our fina aim is to show the financia resuts of interna auditing in the vaue of company it wi be needed to cacuate the Net Cash Fows of the company in case we didn t have interna auditing. In this case it wi need to make the foowing hypothesis: Without interna audit it woud not exist as consequence the reaization of profits of 432 thousands of Euros with corresponding negative consequences in the configuration of Net Cash Fows. The distribution of tota financia profits of 432 thousands of Euros we suppose that it is distributed commericay in three years (with the hypothesis that we consider as singe the scrutinized period in the accumuation of financia profits from the interna auditing), or that it is distributed proportionay according to the profits of each year. For this aim we wi create two scenarios for the cacuation of Net Cash Fows without the interna auditing. According to the above hypothesis the Net Cash Fows with and without the interna auditing, wi be cacuated at Tabe 1. Tabe 1: Net Cash Fows with and without interna auditing for the period 1998-2000 Year NCF with Interna NCF without Interna NCF without Interna Auditing Auditing & Auditing & Distribution Isomeric Distribution Based on Profit (Miion Euros) (Miion Euros) (Miion Euros) 1998 1.3 1.2 1.2 1999 1.5 1.3 1.4 2000 2.1 1.9 1.9 Seection of discounting interest rate for Net Cash Fows The discounting interest-rate for Net Cash Fows represents the required output that the investors expect in a given eve of danger in order to pace their capita in a concrete investment. The discounting interest rate is constituted by two 97
John N. Varvatsouakis eements without risk interest-rate and the premium against risk. The interest-rate without risk is a rate of output that the investor fees with certainty that it can acquire in a given time from the pacement of his capita investment. For our anaysis we wi use an interest-rate without risk the nomina output of short-term Greek Government Bonds of January 1998, which amounted to 12.4%. The premium against risk is the necessary percentage with which it shoud be increased to arrive at the rate of discount, so that the risks of investment are incorporated. The premium of risk for our anaysis wi be cacuated with the essentia of base those who fix the mode of ine of securities. A particuar mode cacuate the premium against risk of foows: i RISK = β X (Rm Rf) = Cov (Rj, Rm) σ m 2 X (Rm Rf) where β = the systematic risk of company Rf = the interest-rate without danger (Risk free interest rate) Rm = the medium attribution of market (Rm Rf) = the required moreover output Rj = the attribution of particuar investment Cov (Rj, Rm) = the covariance between the attribution of investment and the output of market σ m2 = the variance of output of market Appying the particuar mode in our anaysis for the cacuation of premium against risk we can postuate the foowing: Estimate of systematic danger β The examined Greek private maternity cinic is not a isted company in the stock market and for this reason we used factor b of company Athens Medica Center, the oder isted company of heath sector in Greece in the stock market. The factor b was 0.88. We consider therefore that aso the examined Greek private maternity cinic has the same systematic risk with that of Athens Medica Center. This practicay means that if the enterprise was isted in the stock market, the price of its shares woud have atered on average 88% for each change of 100% of the market. Estimate of required moreover output (Rm Rf) According to studies that have been conducted in western money markets this percentage is between 8,5% and 9%, whie in reative research that was conducted in Greece this percentage was appreciated in 10%. For our anaysis we use the percentage of 10%. According to the above hypothesis we can cacuate the premium against risk as foows: i RISK = β X (Rm Rf) = 0.88 X 10% = 8.8% Having cacuated the risk free rate and the premium against risk we can cacuate the discounted interest-rate of Net Cash Fows. As we anayzed above the discounted interest-rate is cacuated as foows: i =i RISK FREE + i RISK = 12.4% + 8.8% = 21.2% 98
Dehi Business Review X Vo. 4, No. 2, Juy - December 2003 Estimate of residua vaue of enterprise The residua vaue of enterprise is the vaue that the enterprise wi have at the end of examined period. For our anaysis we sha presume that the residua vaue at the end of three-year period is appreciated in the present vaue of Net Cash Fows it is expected that the enterprise wi reaize in the foowing two years and that the Net Cash Fows are appreciated in the mean of Net Cash Fows of three-year period. According to Tabe 1 the mean of Net Cash Fows of three-year period is appreciated in the 1,6 miions of Euros (for the case with interna auditing) and in the 1.47 miions of Euros (for the two scenarios without interna auditing). Estimate of vaue of non operationa assets The vaue of non operationa assets incudes those which are not essentia for the reaization of operationa objectives of the enterprise and usuay are acquired for investment purposes or are intended for sae. In the examined period the company does not possess such assets and consequenty the vaue of particuar eement is zero. In this point we have determined a the eements that wi aow us to cacuate the vaue of examined Greek private maternity cinic with and without interna auditing, as this resuts from the mode of discounted Net Cash Fows. For the creation of reative tabes of vaue we wi need of course to make the foowing additiona hypothesis: Hypothesis about the discounted interest-rate The interna auditing has mutipe advantages and can decrease the risks of enterprises. The interna contro system is drawn aiming at the compiance of a) operation of enterprise according to the poicy of administration of b) precision and reiabiity of information c) conformity of enterprise with the aws d) the safety of assets e) the economic and effective use of avaiabe resources and f) the determined operationa aims of enterprise. Consequenty after the risk of enterprise is decreased and the premium of risk is decreased and consequenty the tota interest-rate of discount becomes smaer increasing the net present vaue of Net Cash Fows. From the anaysis we infer that the investors for the determination of suitabe interest-rate of discount take into consideration the interest-rate without risk and the premium against risk. As we cacuated above the first is fixed at 12.4% and the second in 21.2%. Theoreticay we found that the interna auditing eads to reduction of risk, we wi suppose that in the case of cacuation of vaue with interna auditing the discounted interest-rate used wi be between the 12.4% (extreme affair that the risk is eiminated competey) and 21.2% (the maximum imit of discount interest-rate according to the mode of market of securities). Because in practice, the fina eimination of risk is difficut to be achieved ony with the interna auditing, wi cacuate the vaue of company and with two intermediary interest-rates the 15.3% and the 18.2%, that abstain roughy at the same percentage from the two extreme interest-rates the 12.4% and 21.2%. In other words we wi cacuate in the case of interna auditing 4 different scenarios of vaue. Finay in the case of vaue of maternity cinic without interna auditing we wi use the tota discounted interest-rate of 21.2% from mode of market of securities. Hypothesis about the residua vaue For the cacuation and the discount of residua vaue we wi use the same interest-rate of discount of each case. According to the above additiona hypothesis and the eements that we anayzed in this particuar artice we have cacuated the vaue of the company and summarized the eements of 6 scenarios that are created in Tabe 2 which foows at the end of the artice. Tabe 2: Scenarios of vaue of company for period 1998-2000 Scenario Interest-rate of Tota vaue discount (%) (Miion of Euros) 1st: With interna auditing 12.4% 5.7 2nd: With interna auditing 15.3% 5.3 3rd: With interna auditing 18.2% 5.0 4th: With interna auditing 21.2% 4.6 5th: Without interna auditing /isomeric distribution 21.2% 4.1 6th: Without interna auditing /distribution based to profits 21.2% 4.2 99
John N. Varvatsouakis From the review of above tabes and with the base of the hypothesis that have been postuated during the certain concusions can be drown with regard to the change of vaue of the company as a consequence of interna auditing. From the comparison of the eements of the 6 scenarios we have the foowing concusions: Comparison between 1st and 5th scenario The 1st scenario is more positive in the anaysis of financia resuts. This scenario resuts the bigger increase in the vaue of fortune of examined Greek private maternity cinic with the interna auditing, which amounts to the sum of 5.7 4.1 = 1.6 miions of Euros. The particuar increase means according to the hypotheses that were foowed it appears that the vaue of enterprise was increased in a three-year time period by the interna auditing at 36%. Comparison between 1st and 6th scenario The increase in the vaue of fortune of examined Greek private maternity cinic with the interna auditing amounts in the sum of 5.7 4.2 = 1.5 miions of Euros. The particuar increase means that according to the hypothesizes that were foowed it appears that the vaue of enterprise was increased in a three-year time period by the interna auditing at 35%. Comparison between 2nd and 5th scenario The increase in the vaue of fortune of examined Greek private maternity cinic with the interna auditing amounts in the sum of 5.3 4.1 = 1.2 miions of Euros. The particuar increase means that according to the hypotheses that were foowed it appears that the vaue of enterprise was increased in a three-year time period by the interna auditing at 26%. Comparison between 2nd and 6th scenario The increase in the vaue of fortune of examined Greek private maternity cinic with the interna auditing amounts in the sum of 5.3 4.2 = 1.1 miions of Euros. The particuar increase means that according to the hypotheses that were foowed it appears that the vaue of enterprise was increased in a three-year time period by the interna auditing at 26%. Comparison between 3rd and 5th scenario The increase in the vaue of fortune of examined Greek private maternity cinic with the interna auditing amounts in the sum of 5 4.1 = 0.9 miions of Euros. The particuar increase means that according to the hypotheses that were foowed it appears that the vaue of enterprise was increased in a three-year time period by the interna auditing at 18%. Comparison between 3rd and 6th scenario The increase in the vaue of fortune of examined Greek private maternity cinic with the interna auditing amounts in the sum of 5 4.2 = 0.8 miions of Euros. The particuar increase means that according to the hypotheses that were foowed it appears that the vaue of enterprise was increased in a three-year time period by the interna auditing at 17%. Comparison between 4th and 5th scenario The increase in the vaue of fortune of examined Greek private maternity cinic with the interna auditing amounts in the sum of 4.6 4.1 = 0.5 miions of Euros. The particuar increase means that according to the hypotheses that were foowed it appears that the vaue of enterprise was increased in a three-year time period by the interna auditing at 11%. Comparison between 4th and 6th scenario The increase in the vaue of fortune of examined Greek private maternity cinic with the interna auditing amounts in the sum of 4.6 4.2 = 0.4 miions of Euros. The particuar increase means that according to the hypotheses that were foowed it appears that the vaue of enterprise was increased in a three-year time period by the interna auditing at 10%. The comparison of these 2 scenarios shows the ower percentage increase in the vaue of company from the interna auditing. Deductivey from the comparison of individua cases we reaize that with base and the hypotheses that were foowed it appears that the interna auditing had financia profits for the examined Greek private maternity cinic. From the anaysis that preceded and was supported in the financia figures of the company and in ine of hypothesizes it appears that its vaue was increased in a three-years period of time at a sum that varies between 0.4 and 1.6 miions of Euros or in percentage increase between 10% and 36%. 100
Dehi Business Review X Vo. 4, No. 2, Juy - December 2003 References Brink V. (1958) Interna auditing, The Ronad Press Company pubications. Cashin J. (1971) Cashin s handbook for auditors, Irwin McGraw-Hi pubications. Institute for Interna Auditors (1999) The interna Auditing Definition. Kapan J. (1995) An auditor s guide to eectronic audit resources. Interna auditor, Vo. 52 (8) p.22. Kuse J., Oxner T. (1996) Trends in the job market. Interna auditor, Vo. 53 (8) p.20. Ìeigs W., Larsen J., Meigs R. (1984) Auditing, Papazisis pubications, Athens Greece. Moore W., Hendrey D. (1999) IT audits renewa. Interna auditor, Vo. 56. Oxner T., Kuse J. (1994) The 1994 job market. Interna auditor, Vo. 51 (11) p.24. Oxner T., Kuse J. (1998) Working (Current saaries and job trends in interna auditing). Interna auditor, Vo. 55 (7), p.56. 101