[justgivemea75]

Hi all,

I have been talking to a couple of my friends who work in the Financial Services division at my Big 4 firm. While our people can work late, these guys are putting in obscene hours (i.e. 85+ regularly) in FS. Granted, they are working for major, multinational banks, but I was wondering if there is something about auditing banks that is a lot more difficult than a manufacturing firm or what the reason for this is.

Assuming the bank is something like Wells that primarily is in the lending industry, I would think that it would just be a question of testing whether or not the company is amortizing loans properly, right? I mean, they don’t have inventory or some other pieces to audit, and COGS would primarily be the interest rate that they’re borrowing at, right?

Are there more complex transactions that I am not accounting for, or can someone who has experience in this area chime in on the difficult areas within accounting/auditing that make this a challenge that I may be overlooking?

FAR - 84
AUD - 76 (phew)
BEC - 88
REG - 77

DONE!

[Anonymous]

I work in Financial Services for one of the Big 4 firms (specifically in Investment Management and Insurance), and there are a number of things that may affect this…

1) Not everyone knows how to be efficient, but you'll find that in any industry.

2) Financial Services has inventory specific guidance; but again, any major industry you find yourself in will have guidance specific to that industry that you didn't learn in FAR. Both Insurance and Production Accounting (Entertainment) follow have accounting methods that deviate from your standard GAAP.

3) Risk: Like you pointed out, there is no inventory. That also means that your balance sheet contains a lot of very invisible assets, many of which can be incredibly complicated to value.

4) Complexity: An interest calculation is not always so simple as principle*interest rate. How did you verify the principle? Where did you get that rate? Who decided that rate? Floating interest rates? Libor rate? Paydowns? Private Debt? etc.

5) Diversification: Financial Services touch every other industry, so to really understand FS, you need to look at other industries too. If a Bank owns a piece of a production studio or real estate firm then guess what? Now you gotta go understand those industries too.

I could go on, but I'll leave it at that. Personally, I find this area fascinating because it is so complicated.

[thechapman]

I'm not in FS, but I've heard the beefed up regulations that banks face make it more work

Passed - 2014

[justgivemea75]

@AngelCityStories:

Thanks a lot for the awesome reply. Just a few followups if you don't mind:

1. I'm a person who I feel is good at technical concepts and problem-solving. Do you think that FS lends itself to this moreso than other industries? Right now, I'm working on manufacturing jobs and they seem pretty vanilla overall. There are definitely issues, but does FS lend itself toward people who are good with numbers and grasp technical/theoretical concepts easily?

2. What sort of valuation do you do on assets? Do you ever forecast cash flows or anything of that nature?

3. Do you mind briefly explaining why you need to understand the industry that the bank loans to? I was clearly wrong about interest rate being simple, but let's say you have that piece. Why does who that loan is to matter at all? Is it because you have to create reserves for delinquencies and therefore think about whether or not the loan is potentially impaired (i.e. if the film studio could lose money from it's film or whatever?)?

Thanks!

FAR - 84
AUD - 76 (phew)
BEC - 88
REG - 77

DONE!

[Anonymous]

1. I'm a person who I feel is good at technical concepts and problem-solving. Do you think that FS lends itself to this moreso than other industries? Right now, I'm working on manufacturing jobs and they seem pretty vanilla overall. There are definitely issues, but does FS lend itself toward people who are good with numbers and grasp technical/theoretical concepts easily?

FS absolutely lends itself to problem solving, numbers, and financial theory! Its an entire industry built on bets and agreements, and the clients are essentially trying to solve to question of ‘how to turn money into more money.” However, truth is that just about any industry can be interesting if you know where to look and how to look at it. I've done some manufacturing and the concept of supply chain management fascinates me too.

2. What sort of valuation do you do on assets? Do you ever forecast cash flows or anything of that nature?

I have not personally done much in cash flow forecasts and we have in-house specialists who do the more complicated investments; but as an auditor, we I am still required to understand how something is valued.

Perfect example of a complicated asset would be an insurance policy — You pay me premiums and I may or may not ever have to pay you anything depending on whether or not you get in an accident and file a claim. So how do I value this policy? future cash flows out flows aren't certain — maybe zero, maybe 100x the premiums I collect from you, but at 12/31 I need to have it on my balance sheet. There is a MASSIVE amount of data/statistical analytics involving actuaries and risk specialists.

3. Do you mind briefly explaining why you need to understand the industry that the bank loans to? I was clearly wrong about interest rate being simple, but let's say you have that piece. Why does who that loan is to matter at all? Is it because you have to create reserves for delinquencies and therefore think about whether or not the loan is potentially impaired (i.e. if the film studio could lose money from it's film or whatever?)?

Sorry about the confusion — understanding another industry is more often tied to when a client invests in another company. The terms of loans can often have big complicated terms (fluctuating rates, paydowns, penalties, collateral, contingencies, reserves, etc.), but very few, if any, bank is JUST making loans — in order to really profit from investing in/issuing debt, you'd have to take on a lot of risk (trustworthy borrowers don't get charged high interest rates), and that starts to touch on the areas you mentioned.

[Author]

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