Knowledgeable Directors’ views on the Value of AUDIT

Directors who are sensitive about their fiduciary duty accept that the statutory audit enhances integrity and credibility of the financial statements; the sharing of best practices by the auditor helps to improve the financial reporting process and strengthen the system of internal control. Additionally, when the management and the finance team know about an impending audit they make every effort to clean up to ‘keep the house in order’.

Audits can also be described as a health screening exercise, so a good bill of health means a lot to a health conscious person as opposed to a gambler.To many others value is derived as a sort of insurance policy for independent directors. An insurance policy is taken not because you want to deliberately meet with an accident but for protection, in the event you meet with disaster. Audit is performed on historical information. That does not mean that the Directors also keep looking at history for their strategy. You don’t drive your car looking in the mirror all the time. You drive your car as a business owner looking forward. The external auditors will verify what has happened in the past and help you look ahead, see the roadblocks in front, give you advice on how to avoid them.

It is vital that the Board and the Audit Committee spend more time knowing the company’s business operations. They also need to understand how an auditor forms his opinion and the complexities involved. If they don’t know, how are they going to be effective in maximizing the auditors’ usefulness to the organization? 

What does the auditor do in the process of conducting the audit? The financial information provided by the organization is scrutinized and verified. Verification relies heavily on the auditor’s ability to determine the value of the assets and liabilities. They have to not verify values based on cash transactions but they should be fair values which are based on market values.  What about assets that don’t have a simple or ready market? This includes assets like privately held companies, real estate projects, and investments in plantations. All the auditors can do is use whatever information sources are available using a lot of judgment and estimates  –  it’s not absolute. They also verify transactions during a whole year in a very short period using samples. Therefore, audits are valuable provided the Directors are aware of their limitations and use them with caution.

Finally, good Directors understand that ‘You get what you pay for’. If you are going to squeeze the audit firms further, you are going to get shoddy audits because there is simply not enough time for that auditor to spend. He will reduce time by  looking at the overview, too busy and too concerned with getting into the details… It comes down to making sure you select the right auditor at the right price which allows them to do the right job. Thereby, creating value from that AUDIT.

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About surenraj

“Views expressed are my own”
This entry was posted in Governance and tagged . Bookmark the permalink.

One Response to Knowledgeable Directors’ views on the Value of AUDIT

  1. Pingback: Faut-il revoir en profondeur les tâches des comités d’audit ? | Gouvernance | Jacques Grisé

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