There is a common misconception about statutory audits and what they are intended to achieve. A lot of people think that the main purpose of an audit is to detect fraud, when it is actually to provide assurance about the company’s financial statements and reporting. An audit can also be leveraged for additional business benefits.
It’s not just about compliance
Large proprietary companies of course require audits for compliance purposes. They must engage an auditor to audit their financial statements on an annual basis, as dictated by the Corporations Act 2001. From the regulation’s point of view, ‘large’ means any company that meets two of the following three criteria:
- Total revenue of the company and the entities it controls exceeds $25M
- Total assets of the company and the entities it controls exceeds $12.5M
- The company and the entities it controls employs 50 or more employees
Large companies often perceive compliance as a burden rather than a choice. They do not fully appreciate or engage in the audit due to preconditioned beliefs about what the process entails. Rather than see it as an opportunity, they consider it a nuisance.
However, just because something has to be done, doesn’t mean there is no added value delivered as part of the process. A good team of auditors will keep their eyes open for more than just suspicion of fraud and see where they can value add. They can make recommendations on improvements to internal procedures and process, identify major tax risks and provide management with clear accurate financial information on which business decisions can be based.
How an audit added value for this Accru client
When I joined Accru Melbourne, my then Senior Manager and now Director, Cameron Flynn, shared a personal experience. In the first year of auditing a large proprietary company, the Chief Financial Officer of the company was reluctant to assist with the audit process and considered the exercise a waste of time and resources.
During the audit, Cameron and the team made a number of observations and recommendations which helped the company’s debt collection, cashflow, customer invoicing, reconciliation of accounts and management accounting preparation.
At the end of the audit, the Chief Financial Officer thanked the audit team and remarked that they looked forward to next year’s audit. Cameron assumed it was a joke; however, the Chief Financial Officer made a point that he was being very serious.
Why the negativity about audits?
Whatever the reason behind audit’s negative image, some of the blame must be laid on auditors who treat large company audits as their cash cows, fulfilling the basics from a compliance perspective but ignoring the value-add aspect.
What should a good audit entail?
An audit should observe some of the following and provide useful and practical solutions to management where shortcomings are identified:
- Cashflow
- Budgeting and forecasting
- Debt covenants
- Creditor payment cycles
- Debtor invoicing and collection cycles
- Adequacy of budgets and strategic plans
- High level risk management and governance
- Analysis of key drivers in the business including margin analysis, key expenses and investigation of anomalies over a number of years
In addition, an audit provides an independent check on management’s accountabilities and communicates the observations with the ultimate owners of the business. Owners should, as a result, be provided with greater comfort and confidence in their key managements’ performance of duties.
At Accru, we take pride in performing value-add audits and ensuring that the audit experience is a worthwhile one for our clients. Please contact one of our audit specialists if you would like to know more about our approach.