System Migration from an Audit Perspective

System changeovers are often a necessity for expanding businesses in the long term. As a business grows, the original accounting software that a business started with may not be able to cater for the growing needs of the business as it continues its expansion.

Additional functionality is often required, including multi-currency requirements, better cash flow and working capital management as well as enhanced integration with other software (payroll and data analytic systems).

System migrations appear easy on the surface: choose a point in time, stop use of the old system, transfer the historic data from the previous system to the new system and continue the accounting function from this point forward.

However, in practice this is often a difficult and arduous process for all involved. The process includes an IT team, a finance team (the users), and an often-unconsidered stakeholder, the Auditor!

There are two primary methods of performing an accounting system migration:

1. Transactional migration:  Transfer each transaction made in the old system to the new system up until the point of migration. This gives the user a more detailed and transactional view in the new system, without having to reference the previous system post-migration. It is however a more difficult process with increased risk of duplication or incomplete transactional transfer.

2. Closing balance migration:  Transfer only the closing balances from the old system to the new system at the point of migration. The closing balance method will result in the user having to reference both systems in the migration period. There will be two data sets, and two general ledgers that make up the final balance for the period, however the process itself will likely be less complex with less risk of error.

 It is important to consider the pros and cons of both methods when deciding on an approach and have clear timelines and goals in mind.

As statutory auditors we do not consider every aspect of a system migration (of which there are many). Our objective is to provide the reader with an auditor’s view of how we approach a client’s migration, what we as the auditors look for, what would simplify the audit process, and consequently reduce the burden for the business as well.

1. Mapping:  It is important to remember that the auditor must assess the entity transactionally for the entire year under review. As such the auditor needs to be able to evaluate two trial balances and two general ledgers. As a rule of thumb ensure closing balances on the old system at the point in time of migration; are equal to opening balances on the new system. (If using the transactional approach, the same check can be performed on the sum of the transactions being transferred).

2. System codes:  Equally important is that these accounting systems will potentially have differing accounting codes and therefore to evaluate all the transactions for the entire year the auditor needs an in-depth understanding of how and where balances and transactions from the old system are now recorded in the new system.

A clear set of mapping rules that can be provided to the auditors is essential. This mapping document needs to clearly detail the closing balances on the old system linked to the old accounting codes as well as the opening balances on the new system and the new accounting codes. All this needs to be clearly documented in a readable format. It is not enough for only the IT team to understand the detail of the migration. As soon as the auditor is unable to follow the migration trail and starts their own separate reconciliation process, this will inevitably use up additional time and put pressure on deadlines.

3. Retained earnings:  The first check the auditor will do is the retained earnings check. This check is to make sure the closing balance of the retained earnings account in the old software corresponds to the opening retained earnings balance in the new software. Further it is critical that retained earnings can be reconciled to the prior year Annual Financial Statements.

If the opening retained earnings agree to the prior year audited financial statements, and the changeover balance can be reconciled back to old system, the auditor can at least be satisfied that all balances have been carried across to the new system and have been correctly classified to Balance Sheet / Income Statement. Even if mapping (as mentioned in point 1) is not immediately clear, this still provides the auditor with comfort that the big picture migration has been executed correctly and that only details need to be ironed out.

4. The end-product:  The end-product is a set of financial statements, so while there is a lot of detailed work required when undergoing a system migration, it is important to maintain big picture comparability. If a business had an expense line item of $10,000 in the prior year, there needs to be clear comparison to the current year expense line item that is consistent in the way that the expenses have been grouped in the past.

The prior year financial statements were compiled using the previous system’s accounting codes, so it is important to maintain consistency in the latest set of financial statements when it comes to account grouping for final reporting purposes.

5. Timing:  Start the process early; provide communication early on to the auditor that a system migration is ongoing. This will allow the auditor to factor the additional procedures into their timelines and avoid unnecessary time crunch and pressure, both for the business and for the audit firm.

6. Internal understanding:  As a CFO/Finance manager, ensure the entire team understands the migration. This includes the bookkeeping team who are processing the transactions. Once the new system is live it is essential that the bookkeeping team understand the new process of booking transactions and that they know which new accounting codes correspond to the old set of accounting codes.

 If the bookkeepers aren’t certain about how transactions are recorded (in the new system with the new codes) then reconciling the new GL to the old system GL, can become a messy and frustrating process. Further it forces the auditor to escalate far more queries to an executive/management level, thereby creating consistent, large and unavoidable disruptions to day-to-day activities within the business.

In summary, have a clearly defined process before data starts to move. Have this process and the details of conversion clearly mapped out and written down. Keep the auditors informed and ensure all relevant internal personnel have a clear understanding of the new accounting process in place.

Happy migrating!

By: Ilan Aronson CA(SA)