Value of AUDIT

Every Director who takes up the position should be made to understand the following.
After every collapse of a large company, the debate on audit quality springs up. Some ask, If audits were really worth anything? After all, the big financial companies that are in trouble all have “clean” audits. So what’s an audit really worth  – to understand the reality, one needs to answer the following question, honestly. ” We take our cars for a service 2or3 times a year, yet one day it meets with an accident, due to a brake failure or drunken driving or due to another vehicle which was driven negligently. Therefore, What was the point in taking the car to a service centre, regularly?”

First, you have to understand what an audit is, and what it isn’t. An audited financial statement contains standard financial information, supplemental footnotes, and the all-important opinion letter. The letter expresses an independent opinion on the completeness and accuracy of the financial information up to a date in point, to the existing shareholders. The opinion is not an assessment of the financial condition or future prospects of the organization.

To explain what an audit isn’t, I need to continue with my analogy of a car. When a car is put for a service, the service centre will not replace the brake pads- because they’re wasted?, the service centre will not force you to change your tires because they’re bald?,  the service centre will not confiscate liquor from your vehicle because you may consume while driving?, nor will they overhaul the engine because it’s inefficient? However, they may comment about some of the issues in good faith, but that was not their job (scope). 

Therefore, by submitting to a statutory audit companies can identify potential procedural weaknesses based on comments made by the auditor and make changes prior to suffering financial difficulty or organisational failure. This is crucial to maintain public and stakeholder confidence in the business as well as enabling the business to operate with minimal losses. This process is entirely within the control of the Board of Directors. They can act on the comments or ignore them. By identifying potential risk and procedural deficiencies before they cause damage to the functioning of the business, organisations can reduce risk, cut costs, increase efficiency and maximise revenue thus safeguarding their future. This can be considered a by product of the statutory audit.

In the name of governance and independence, Boards have forced audit companies into a price war. However, quality has become the casualty in the audit price war. Those who demand ‘Value’ should also remember the proverb: “Cheap things no Good, Good things no Cheap”. But continue to ask for more Value!

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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 Value of AUDIT

  1. Pingback: Financial Audit Helpful for Financing, Funding, and Selling Business - Mason Myers Blog

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