adminAUDIT has proved its worth to both investors and companies alike over the years.
It typically brings value to business and the wider economy by reinforcing trust and confidence in companies’ financial statements. But as the events of the last decade have shown, it’s time for change; it’s time for a revolution in audit thinking and execution.
Business has changed, shareholder needs have evolved and audit needs to keep up. This value mainly derives from confirmation over historic financial information, as shown by the resulting reduction in the cost of capital.
The value of an audit, however, highlights its major limitation: it only deals with historical financial data.
Although an audit reduces the cost of capital, it has less – some would say declining – relevance to capital markets.
Investors are more concerned with what drives share price and organisational value than with annual reports. Auditing company accounts has required a cautious approach.
Yet now the rapid change in the nature of how companies create value and how investors judge them demands change and innovation from auditors.
In many cases, financial statements no longer give sufficient insight into companies’ changing fortunes. So auditors must evolve themselves in order to remain relevant as a profession.
In Zimbabwe, some SME’s may not see the relevance of being audited. The minute one talks of getting an audit done, it is often thought that the reason is to identify theft or fraud. That is not necessarily the case; audit involves more than just identifying fraud and theft. Auditing is a systematic examination of books, accounts, documents and vouchers of a business to ascertain how far the financial statements present a true and fair view of the concern. It also ensures that the books of accounts are properly maintained by the concern as required by law.
The main object of audit is to find out whether the financial statements of a particular concern show a true and fair view of the earning and financial position of a business. It is considered as review function.
If you do not see value in audits, it is prudent for you to start considering being audited. Do not just look for auditors when you suspect fraud or when you want to witch-hunt. A third eye may pick up weaknesses which the management may fail to pick.
For example an audit might help you put your costing model in perspective, including the obligations that you owe to statutory regulators. As a business leader, you may be too busy focusing on strategy and business growth, so it is vital you get auditors to give you an insight on certain issues you may miss.
Auditors are independent and “speak their mind”.
This is where the real value is. Audit provides an invaluable independent perspective on the numbers generated by management. Challenging questions from auditors and subsequent responses by management give confidence to stakeholders that the figures are reliable for financial reporting purposes. The auditor is well-placed to bring to their attention any current or potential problems. Auditors’ knowledge of new accounting standards is also very valuable. An audit cannot be more relevant than the information that is subject to the audit. In my view, the quality of the audit is one thing and the relevance of the information we audit is another.
I think that audit quality has improved, to some extent because of stronger oversight and also because the profession has decided that quality is essential for driving our efficiency. What has not been addressed so far is the relevance of the financial information we audit.
I think we should not short change our clients, because auditors have to have all-round skills. Nonetheless, there’s a perception that auditors have too much of a compliance mindset.
For example, international financial reporting standards have become more complex over time and people say auditors focus purely on the complexities of the standards. Similarly auditors have introduced electronic tools to aid their job – and there’s a risk that they become an end in themselves. It seems auditors are more all round than they’re given credit for. To get more value, it is internationally advisable to change auditors after a period of at least five years.
I did a short survey in Harare and I noted that most directors do want to be audited by big firms because of the name of the firm. Some argue that one can also get value from smaller firms. They also produce quality reports.
◆ Taurai Changwa is an articled accountant and ACCA finalist. He is managing director of SAFIC Consultancy. He writes in his personal capacity and can be contacted at [email protected], Facebook page SAFIC Consultancy and WhatsApp number 0772374784.
Online Reporter