Often when organisations are deciding whether or not they require an audit they will come to us to discuss the benefits that an audit can offer them. Far from being just a compliance obligation, an audit can provide real value to an organisation and its management when performed effectively.
What these benefits are often depends on the circumstances of the business in question and what they are trying to achieve, but some of the more significant benefits include:
Improved reliability of financial information
Directors and other managerial staff are often dependant on financial information for making the key decisions surrounding the operations of the organisation, and rely on the financial information available to do so. In particular, directors may be held accountable for the financial information they are relying upon if that information is misleading and their reliance is seen to have been misplaced (for example, under the Corporations Act 2001). An audit provides assurance that reliable financial information is being generated and that the accounting function is ensuring compliance with relevant laws and regulations. In our experience, a recurring external audit also instils a greater sense of rigour and diligence in accounting staff in the knowledge that the accounting records will be subject to independent scrutiny.
Improved credibility of financial information
It is often the case that external parties will require you to provide them with financial information. This may be a major supplier or financier looking to assess credit worthiness, or a potential acquirer in a significant business transaction. In these situations a financial audit would provide credibility to the information being provided to the other party and give that party the confidence and security they are seeking whilst transacting with your business. It can also add credibility to any existing reporting arrangement, such as covenants reporting for a major financier. In addition, a track record of audited financial information can assist in potential exit scenarios such as a trade sale or an initial public offering.
Improved control over financial information and assets
An external audit considers internal control to the extent it is relevant to the audit and may raise internal control deficiencies which are reported to the Board and/or management. In addition, significant audit risks are often communicated to the Board as part of the audit communication process. This can be invaluable in assisting management with their own determination of the risks facing their business. This could be through the potential misappropriation of an organisation’s assets or poor controls over the security of assets.
In addition to these areas, there is often value to performing an audit before it becomes an obligation, addressing any potential issues early and ensuring that the organisation is ready for an audit.