Audit: what it was, what it is, and what it shall never be

Audit: what it was, what it is, and what it shall never be

As we near the end of 2018, another year wrought with audit scandals, what do we know about the state of this age old practice?

Once upon a time, when businesses were not extremely complicated, multi-jurisdictional, billion dollar entities that record  all in some even more complicated, badly rolled out, computer system that shows no finger prints, smudgies or tipex. Audits probably made more sense.

It was probably possible for a decent accountant to come in and have a good old check of your hand written books, and check your cash balance, and your processes and say in less than 50 words (that was the length of audit reports in the 1800’s) “I popped into Ye Old Fish N Chippy and checked the bank balance, the books of records, and asked some questions. Things made sense, books could be read, fryers were kicked, chips checked, and therefore, this “plaice” is what it says it is, and you can roughly rely on his records”

Somewhere along the way several things happened.

  • Lots of businesses got big.
  • Business went global
  • Everything moved onto computers and became 1’s and zero’s – ultimately hard to tell the difference, and easy to mess up or hide your tracks
  • Stock markets crashed, repeatedly, and major companies failed. Each time people said – “we need answers, we need trust” Therefore requirements went up, right up.
  • One main new requirement was we want auditors to tell us that the business will be here tomorrow.

So now we are in 2018 and well we, the public, have had enough (again). But there is such a fundamental misunderstanding of what an audit tells you.

An audit really these days tells you that “Yes there is a building with real people in it, there is a real company, and it does appear to be making sales, buying things and generally trying to do stuff like that.

We have looked at big numbers on their balance sheet and given them a prod, found pieces of paper which said that these numbers are what they said they are, and we have asked all sorts of detailed questions about their systems, and other numbers we didn’t understand.

They have explained through cashflows and support that that they think they will be around 12 months. We still don’t’ really understand the business, as no one does, but as best we can yeah it’s a business – not a giant front for Al Capone.”

Now fraud is very hard to spot, particularly if you are team of inexperienced auditors.

And this is another problem, cost. Audits cost a lot of money, and people don’t like paying for them. I can think of people in this firm you could send with so much experience they are far more likely to be able to spot a fraud, or something odd, and be tough enough to not be appeased by half answers and misguidance. But the trouble is the cost would be astronomical to take a senior partner get them to audit testing.

Furthermore, auditing is so open to failure as an approach anyway. Let’s consider a guiding principal “Materiality”. While it makes sense, actually it just means anything is possible, because a small number on a balance sheet could represent something very big, and what if it’s not on there at all? Bottom line as all accountants know, unless everything balances to the penny and you check everything, in reality you have checked nothing!

And to be fair to the Big Four, they have an impossible job, who would want to do an audit of a giant company? The sheer risk and responsibility of trying to measure up an elephant in 26 countries, split into a million pieces, all recorded on multiple IT systems under time pressure with a client putting pressure on you isn’t so attractive and unsurprisingly easy to get it wrong.

But that doesn’t mean we don’t need change, and it also doesn’t mean that Auditors find themselves too close to the big companies, and too dependent on their fees, and scared of upsetting the client.

And that’s the point really. Auditors, aren’t, or shouldn’t be, accountants. The training of an accountant is to help people.

Auditors should be independent. Different training, different firms, different clients, the public. They should be independently paid, like in France where they all give money to a central fund that then runs the audits. That is most important change. Second they need to be trained to be inspectors, not accountants.

They probably need a combination of computers and auditors to find the anomalies in the ledger, a highly experienced police person to look for fraud in the team, and a good fund manager to guess whether the company would be here next year.

That audit report would be much better.

 

Andrew Oury is a Partner at Oury Clark Chartered Accountants

 

 

 

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