- The audit profession adds value to the economy.
- Audit is more than compliance.
- External auditors are a valuable tool for the audit committee.
By Michael Coleman FCA.
As an audit committee member, I get to see and talk to external auditors and appreciate their contribution to our business.
Having the audit team undertake independent assessment of our reporting processes and practices is an important checkpoint. This process can act as a brake on potentially excessive enthusiasm for particular accounting treatments, which may otherwise take hold at an organisation.
Investors know that there has been substantial work and evaluation allowing a person independent of the entity to form an opinion on the accounts.
The audit committee and board receive information and reports from a large number of sources and our role as committee members is, in part, to make connections and pull together the picture. Challenging the auditors on their work and their findings is a key piece in this puzzle and the objective voice is much valued.
But as valuable as the audit can be to individual audit committees and boards, the audit profession also plays a vital role in the broader economy.
Having integrity and trust in business has never been more important. The amount and speed of data, information or misinformation that is available is substantial and ever increasing, all available for potential investors, financiers or consumers.
So where does the annual reporting process fit in? It is often said that annual financial reports, and the audit opinions thereon, do not move the markets. I agree.
The audited financial reports are not the main basis for investment decisions. However before making a decision to invest or finance, consideration is given to the financial position of the entity. This is where the annual financial reporting process comes to the fore.
The annual financial statements provide a core databank which can be directly compared to similar organisations due to the adoption of common financial reporting standards.
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The audit opinion itself has been more or less a binary statement (clean or modified) and the template words tend to convey little. But try and raise funds without audited financial information and you will quickly see the importance of this piece of paper.
Behind the standard wording in a typical audit report, investors know that there has been substantial work and evaluation allowing a person independent of the entity to form an opinion on the accounts. This is what investors need to know, and this is what an audit provides.
Trust in the process
The introduction of “key audit matters” for listed entities provides the auditor with the opportunity to publicly explain more of their areas of focus and how these were addressed in the audit process.
Whether this will provide more comfort to markets will be seen. It has been argued that this is necessary to allow trust in the audit process to continue. Investors are no longer content with the binary, standardised reporting by auditors and need more to justify their trust in them.
Markets and successful economies need to be able to trust the information provided. The audit process is an important element on top of investor’s knowledge of the business and its management.
I firmly believe that the cost of capital for organisations is lower because investors are able to trust the financial information they are provided with via the audit work. Is a financial statement audit valuable to my boards and their business? It sure is.
Michael Coleman FCA is a non-executive director of many boards including Chairman of the Audit Committee at Macquarie Group Limited.