Audits can take many different forms, including financial, compliance, tax and more. Most UK businesses are legally required to have their annual accounts audited by an external firm unless they are exempt.
While a necessary evil to guarantee data quality for clients, financial reporting is complex and can trip up even the most experienced professionals.
If your business fails an audit, the results can significantly damage your company and lead to financial loss, reputational damage and regulatory scrutiny. In short, it’s best to avoid mistakes and failure where you can. Here are the most common financial mistakes and how you can avoid them:
Robust Financial Recordkeeping
Having inadequate financial records and documentation makes audits more challenging and could potentially lead to non-compliance penalties. A lack of supporting documents, records of company procedures and evidence of adhering to accounting policies makes the job more difficult for your accountant and more likely for material misstatements to be made.
Maintaining robust financial recordkeeping is the key to accurate tax determination and will save you a lot of time and money in the long run. You can boost trust in your organisation’s processes by establishing documentation standards that align with the business’s policies. Staff should be provided clear directives on how to document and organise documentation.
Regular Internet Audits
A lack of awareness by employees about their responsibilities and understanding of company financial processes is another common threat to auditing. Regular internal audits are critical for monitoring your business assets and ensuring they are safeguarded from threats. These programs provide objective insight into day-to-day operations and ensure legal compliance.
The internal audit process mainly involves detailed interviews and document analysis aimed at senior management and board management, depending on the size of your business. Many accountant firms provide an auditor who will summarise their findings and recommendations in a report. It is then up to the company to decide whether and how to act on these results.
You’ll receive useful information regarding your business reputation, growth, environmental impact and employee welfare.
Professional External Auditors
Having a professional auditor who has no previous affiliation with an organisation helps to boost the accuracy of account management and increases the likelihood of systematic errors being highlighted. It also boosts your credibility as a business owner as it allows the verification of financial records and statements and commitment to transparency.
This in turn increases an organisation's likelihood of receiving funding for a new project and encourages new investors.
The objectivity and expertise brought to the auditing process improve overall company decision-making and identify business risks before damage is incurred.
New technologies and innovative solutions are introduced constantly – most notably, blockchain technology. Blockchain can change how all aspects of accounting and auditing processes take place.
It not only has considerable benefits for current financial systems, but it also promises new ways of performing accounting tasks with a remarkable level of transparency and accuracy.
In this article, we'll explore the basics of accounting systems, auditing processes, and how blockchain-based technologies (such as DeFis, DAOs, or dApps) revolutionize traditional approaches.
Accounting Systems
Accounting systems are the backbone of any business's financial management. They're responsible for keeping track of every financial transaction and record so that businesses can operate within legal guidelines, make data-driven decisions, and ensure the accuracy and maintain the integrity of their finances.
With blockchain technology, accounting systems have taken on a new dimension of transparency for businesses. Because blockchain enables decentralized storage and sharing of transactional data, all participants on the network can view these transactions in real-time, thus rendering traditional bookkeeping procedures nearly obsolete.
This feature is particularly crucial for auditing purposes where transparency is vital. With blockchain technology, auditors have a greater degree of visibility into transactions leading up to the accounts they're auditing than ever before.
Moreover, with a more transparent ledger on which to base their analyses, auditors can perform such operations faster since it takes substantially less time for them to locate relevant information within an online ledger or database without manually searching through individual documents.
Accounting systems utilizing blockchain technologies offer increased transparency providing competitive advantages for those using these advanced systems while minimizing compliance risks - which ultimately will lead to better decision-making and higher profits.
Auditing
Auditing processes are vital in verifying financial statements and ensuring the accuracy of transaction records. Traditionally, the process is complex and often involves manual input systems that require a lot of time to review every individual document.
With blockchain technology, however, auditing has become more efficient than ever before. Since financial data is stored on a distributed network of nodes, users view transactions in real-time and help eliminate inconsistencies between different ledgers.
The use of Vena as a financial consolidation software can further this process's simplification, bringing together financial information from multiple sources to quickly create a comprehensive view of an organization's finances.
It securely automates the preparation and generation of consolidated financial statements that will allow companies to reduce operating costs and minimize human error while consolidating all data.
Smart contracts also provide predetermined rules where conditions agreed upon by multiple parties must be met before triggering specific transactions; this improves risk management as well. These factors contribute to higher efficiency through automation and systematization alongside reducing costs in operations.
Decentralization
Decentralization is a characteristic feature of blockchain technology that is transforming how we think about data storage and access. The concept behind decentralization is to eliminate the traditional centralized systems prone to single-point failures. For example, banks serve as intermediaries in most financial transactions, with the responsibility of recording transactions and storing data.
However, blockchain technology has replaced these intermediaries with smart contracts embedded within the transaction records of every participant on the network. The decentralized system eliminates fees associated with middlemen since value transfers occur directly between peers without reliance on trusted third parties.
In addition to eliminating middlemen from financial transactions, decentralized platforms like DeFis (decentralized finance), DAOs (decentralized autonomous organizations), and dApps (decentralized applications) offer unlimited opportunities for participants to use digital assets creatively.
With DeFi solutions built on top of blockchain networks, people can obtain loans, trade stocks, or other securities without any intermediary or credit check needed - while retaining complete control over their underlying collateral.
Furthermore, DAOs enable users to vote on critical decisions collaboratively by communal voting mechanisms thus replacing traditional hierarchical structures. This mechanism creates a much more democratic and participative culture - reducing the influence few powerful individuals may have in corporations or governments.
Smart Contracts
Smart contracts represent one of the essential features of blockchain-based technologies that enhance business processes while reducing costs. They are digital contracts, designed to execute automatically based on predefined rules encoded within them.
For instance, companies can set up smart contracts that automate payment processing once specific conditions are met. This feature offers transparency and trust by displaying the smart contract's code publicly so that every participant can view it.
Moreover, smart contracts eliminate traditional intermediaries such as lawyers and banks since they reduce the risk of human errors or biases involved in manual intervention. As a result, businesses save significantly on legal fees while maximizing transactional efficiency with instantaneous settlement.
Since DeFis leverages blockchain-based technologies to offer financial services without intermediaries such as loans, insurance, trading, collective investments, and others through tokens or cryptocurrencies, it paves the way for new investment opportunities beyond traditional fiat currencies.
Wrapping Up
In conclusion, whether you're an entrepreneur or an accountant, understanding these advancements can help you make more informed decisions, innovate on existing systems and take advantage of new opportunities, such as DeFis, DAOs, or dApps. So, keep exploring and experimenting with them!
Proposals to break up the dominance of the so-called “Big Four” audit firms and scrap the industry regulator have been unveiled by the UK government.
The aim of the proposed reforms is to improve regulatory standards and force company directors to take greater responsibility in ensuring accounts are accurate. Failure will result in the imposition of new, tougher penalties.
The plans to overhaul the sector come in the wake of the large-scale collapse of several prominent companies including Thomas Cook, Carillion and BHS. These collapses were cited by business secretary Kwasi Kwarteng as evidence that the UK audit regime “needs to be modernised with a package of sensible, proportionate reforms.”
“Restoring business confidence, but also people’s confidence in business, is crucial to repairing our economy and building back better from the pandemic,” Kwarteng said. “When big companies go bust, the effects are felt far and wide with job losses and the British taxpayer picking up the tab.”
The government’s new proposals would require KPMG, Deloitte, PwC and EY – the “Big Four” firms in the global accountancy and audit industries – to make their auditing processes more rigorous, and could place a cap on the number of FTSE 350 companies they are allowed to audit if these improvements are judged to be lacking.
Almost a third of FTSE 350 audits inspected last year were in need of improvement, the government said.
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To “water down the supremacy” of the largest auditors, the government’s proposals suggest that big firms be required to use smaller “challenger” firms to conduct a portion of their annual audit. This is also intended to mitigate concerns of conflicts of interest arising from large firms providing both accountancy and auditing services.
Business growth consultant Daniel Groves outlines the key checks to ensure a business is performing at its best in 2021.
People often associate audits with uncertainty; stripping back daily routines and cutting away at workplace stability. Given the year we’ve just had, it’s understandable that a company audit probably sounds like kicking your team while they’re down, but that shouldn’t be the case.
When carried out conscientiously, audits are going to relieve pressure on your bottom line, and therefore your employees. Working through the pandemic will have fundamentally changed the face of your business, and how daily operations are carried out. So, getting a clear, current perspective on how things are running - and how your employees are impacted - will equip you in making efficient, profitable decisions for the long-term.
Here are five key audits that SMEs should be carrying out in 2021 in preparation for workplaces to reopen.
1. Employee welfare check-ins
Everyone has been affected by 2020 in different ways. Chances are, your workforce are no longer just your employees - they’re now also part-time carers, or juggling their child’s education. They’re more likely to be struggling with bereavement, financial worries or health concerns, and may be either incredibly isolated or stressed about being unable to work uninterrupted.
Last year, the UK lost an estimated 17.9 million working days due to mental health concerns. Checking in with your staff will help you understand the strengths, weaknesses, opportunities and threats facing your teams in the coming months. Anonymous surveys can provide some information; team leaders might be able to give better insight. You can find useful resources, like this guide to workplace mental health, if you need assistance with this.
Checking in with your staff will help you understand the strengths, weaknesses, opportunities and threats facing your teams in the coming months.
In some instances, adjusting employee schedules or hours can be a benefit to the company and the individual. Ultimately, responding sensitively to the needs of your team will remind them that their contributions are valued, boosting your employee retention and helping to maintain productivity and operational stability moving forward.
2. Policy audits
In the last 12 months, we’ve seen endless examples of how company policies need to evolve and grow. A policy audit helps you emphasise your organisation’s priorities and your key expectations about employee behaviour. It’s also an opportunity to review policies that are outdated, unenforceable or no longer representative of company ethos.
A policy audit will mean taking stock of your existing workplace rules and deciding which are the most important - whether that relates to technology usage, data security, company objectives, staff welfare or something else. This policy audit outline is aimed at IT companies but translates well to other organisations.
Survey your staff to determine which policies seem challenging or irrelevant, and see where you can revise and clarify most effectively. Communicate with anyone involved in writing those policies, and make sure they’re still relevant and being effectively followed in the current climate. The Basecamp Employee Handbook offers an interesting and modern example of policy tone and structure.
A policy audit provides your employees and management with a refreshed understanding of what it means to be a part of the company. It demonstrates professional flexibility and conscientiousness, both of which are going to be vital in adapting to the climate of 2021.
3. Waste management
Waste management is a common headache for growing businesses. Although it’s probably dropped off the radar with offices being closed, you have an opportunity to limit your waste collection costs when you reopen. Plus, it always helps to give your company a greener image.
Waste management is a common headache for growing businesses.
Waste audits involve counting the number of bins around your site, assessing the type of rubbish inside and identifying where the bulk of waste is originating. It may be immediately apparent, for instance, your building discards a high volume of plastic cups, or bulky paperwork.
“Regardless of industry or company size, a waste audit is the first step needed to be taken to establish where improvements can be made and how to increase recycling within a business.” - Countrystyle Recycling
Reducing the number of bins, positioning them more centrally and providing ways to segregate recyclable materials can nudge staff behaviour in the right direction. Adjusting workplace systems - like providing communal drinkware, or going paperless - will reduce waste further.
4. Paper processes
Paper-based processes stack up to big business costs - especially when you consider that the average employee apparently uses over 10,000 sheets of paper a year. Identify the source of your physical paperwork now, and reap the benefits of a paperless (or near-paperless) system when your workplace reopens.
Lots of organisations have digitised during lockdown. Meetings, desk drive-bys and wet signatures have been replaced with video calls, instant messaging and eSignatures. Using cloud-based services, digital contracts and electronic proof of delivery (E-PODs) allows documents, signatures, order forms and invoices to be shared instantly, tracked accurately and stored securely.
If you’re sceptical, calculate how much your company spends on printing materials and machinery, plus postage costs. Then add the approximate rent of each square foot of your paper filing systems, the rates of your employees as they task-switch between screens and physical documents and, of course, the cost of shredding, recycling or discarding waste paper.
5. Office capacity audit
SMEs are typically hyper-conscious of their headcount and available office space. However, with the future of onsite working changing, 2021 is the time to re-evaluate your figures.
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Experts are predicting that ‘hybrid’ working will be the new normal, and UK employers estimating that around 37% of employees will regularly be working from home post-pandemic. This potentially means that workplaces can be significantly smaller for the same number of employees, as long as realistic hotdesking practices are put in place. As a result, businesses may find it possible to save thousands on rent.
Talk to your staff about their workplace preferences with regards to working onsite full-time, part-time, or only on occasion. Compare this to what you and your team leaders see as necessary for productivity, and plan accordingly.
In Summary
Everybody wants 2021 to be happier, healthier and more successful than last year. These five audits work in harmony with each other to reduce burdens on both individual employees and company finances, allowing businesses to flourish under the demands of the ‘new normal’.
Take the opportunity to acknowledge everything your team achieved against adversity in 2020, and work together to create positive and sustainable change this year.
Nonetheless, last month high street retailer Sports Direct pleaded with the Big Four to take over their auditing process, which it said a smaller firm would not be able to handle. Sky News reported that the Shirebrook company, the firm heading up Sports Direct’s insolvency, approached Deloitte, EY, PwC and KPMG to ask them to take on one of the toughest jobs in the profession. But is it actually true that any of these Big Four firms would do a better and more thorough job than a smaller firm?
Challenges faced by Big Four
Following the demise of Carillion and BHS, the Competition and Markets Authority (CMA) recently entertained the possibility of the Big Four being split up, forcing them to work with smaller rivals. However, it instead recommended that government officials hold the Big Four accountable when it comes to the close relationship between their auditing divisions and more lucrative consulting services, in order to avoid a conflict of interest. It also stated that it is open to revisiting the prospect of a breakup in five years if the performance of these firms does not improve.
Splitting up the Big Four would certainly change the dynamic completely, and allow smaller firms to show their worth when it comes to larger Sports Direct level ordeals, but it would also create a much more competitive playing field for smaller firms, leaving large organisations without a go-to solution.
Another challenge the Big Four currently face is the rise in new technologies, especially on the back of digitisation and increased regulation. According to a survey from the Chartered Institute of Internal Auditors (IIA), just under 60% of auditing firms believed these factors to be significant problems ahead in 2019.
According to Christian Wolfe, a regular reporter on the Big Four firms, machine learning, artificial intelligence and blockchain accounting solutions are fair game for all smaller firms, and the way it currently works is that “if you want public financial statements that investors trust, you must use a Big Four accounting firm.” However, he points out that once you’ve eliminated the margin for human error, recording and verifying transactions will be equally as trustworthy regardless of which firm you approach for the job.
That sounds a lot like a level playing field when it comes to accounting and auditing performance.
Spread of audit work
This leads me to discuss why in fact it is not an actual level playing field in the auditing profession. Simply put, the spread of work when it comes to the larger Carillion or BHS situations is too much for a smaller company to handle. In this regard, Sports Direct are correct. The Big Four, individually, never mind put together, have the manpower and resources, on a global level, to confront the largest tasks.
The spread of work when it comes to the larger Carillion or BHS situations is too much for a smaller company to handle.
Economia reports that the amount of FTSE 100 clients on retainer between the Big Four has never been closer. In 2005, EY held the least, at 19 FTSE 100 clients, while PwC held the most at 41 FTSE 100 clients. In Q3 2019 the numbers are much closer. EY now holds the least at 22 FTSE clients, while PwC still holds the most at 27 FTSE clients. Clearly, the spread between the Big Four has become more even over the past 15 years, however 100% of FTSE 100 companies are now on the books of a Big Four auditing firm. In September, Steve Smith, research manager at Adviser Rankings Ltd told Bloomberg that “the Big Four have cornered the FTSE 100 market.” And he’s not wrong.
This is not yet the case with FTSE 250, but it’s not far off. According to the figures from Adviser Rankings, the Big Four currently control 95% of the FTSE 250 market in terms of number of clients, and 96% in terms of market capitalisation. The parity between the Big Four and all other auditing firms, based on the number of the UK’s largest companies that contract them, is worrying. The other two firms that control a small share of the auditing of FTSE 250 companies are BDO LLP and Grant Thornton LLP.
These numbers are the real figures on client retention, and should essentially serve as proof that the Big Four are in fact still the best, otherwise, surely the FTSE 100 or 250 would seek auditing services elsewhere?
How much they are paid
As the Big Four are by default considered the best, they of course also cost the most, and partners in these firms are earning figures you can only write on paper. Recent reports indicate Deloitte Partners are due their biggest payday in a decade; the average pay for 699 of Deloitte’s equity partners is $882,000 in 2019, moving up an average of $50,000 from last year.
In addition, Deloitte’s combined member firm revenue has risen a chunky 9.4% to $46.2 billion (£37.4 billion) since last year, and in 2018 this number had already grown 11.3% on the previous year. The growth is volatile, but it is significant growth for the company’s bottom line.
Based on the above, you would figure Deloitte, the largest of the Big Four, is charging its worth in gold, but are the companies that are paying these huge firms getting a fair deal in return?
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Quality Ranking
In terms of quality standards, the Big Four auditing firms are assessed and regulated, often by each other, which in a market of fierce competition between them, is a fair and appropriate method of benchmarking standards. There aren’t rankings available per se, but each of the Big Four has its own strengths and weaknesses; EY, for example, is more Europe centred and therefore by default performs better for European based firms.
On the topic of performance quality, Gennaro Senatore, former Transaction Services AM at KPMG, said on a Quora forum: “…with IFRS and Generally Accepted Audit Standards I can tell you the differences are getting less and less noticeable.” He mentions PwC having an edge, or “at least perceived.” While he says that in terms of advisory, in Europe PwC has the most successful treasury practice, EY is stronger on internal audit and Risk Services, and Deloitte in implementation and IT projects. He concludes that KPMG is very good all-round and has a very strong tax practice. However, the performing results will be different for each client, for each auditing firm, so these opinions are after all highly subjective.
More recently, the UK Financial Reporting Council issued a serious warning about the quality of audits of financial statements in the UK. The watchdog stated that the Big Four have YoY failed to meet the benchmark 90% target of large company audits requiring no more than limited improvements. In 2019, of all auditing firms, 75% of audits reached that level of quality. The consequence was £32 million ($39.5 million) in fines (see above for Deloitte’s bottom line and then think about how this could possibly disincentivize poor performance).
Sir Winfried Bischoff, the outgoing chairman of the FRC, said in the watchdog’s report: “We are not seeing more immediate improvements from the [audit] firms and there is undesirable inconsistency across the market.”
The Big Four have YoY failed to meet the benchmark 90% target of large company audits requiring no more than limited improvements. In 2019, of all auditing firms, 75% of audits reached that level of quality.
Clients Dissatisfied
Despite not improving their performance, the Big Four are set to maintain the top tier stranglehold in the auditing sector, which is strange because a study by Source Global Research found that although over two-thirds (68%) of audit clients still rank a Big Four firm as their go-to external auditor, over half (58%) do not name their current auditor as their first choice.
In the US, there are reports of the Big Four bungling 31% of their most recent audits, as analysed by the Public Company Accounting Oversight Board (PCAOB). The data shows that in 2019, Deloitte bungled 20% of audits examined, PwC bungled 23.6%, EY bungled 27.3%, and KPMG bungled 50%. For what is expected of the Big Four, falling short of near-perfect is a bad image, so missing the mark on 31% of audits could be considered poor performance for the top firms; firms which are paid and are growing as if they were truly the best of the best.
(Source: www.pogo.org/investigation/2019/09/botched-audits-big-four-accounting-firms-fail-many-inspections/)
According to The Independent, Stephen Haddrill, the FRC’s chief executive, said: “At a time when the future of the audit sector is under the microscope, the latest audit quality results are not acceptable.
“Audit firms must identify the causes of their audit shortcomings and take rapid and appropriate action to improve quality. Our latest results suggest that they have failed to achieve this in recent years.”
So are the audits that were surveyed by both the UK and US watchdogs actually botched or bungled, or are the firms simply not as good as everyone thinks they are? Are the Big Four really still the best?
Based on what we’ve looked at, it is apparent that action should be taken, and further regulation implemented, while large companies should start considering the auditing and accounting services of smaller consultancy firms and perhaps then the status quo on the Big Four will change. What are your thoughts?
Against the backdrop of evolving business demands and rapid technological disruption, the Robert M. Trueblood Seminars for Professors enhance accounting and auditing education to build the next generation of accountants and auditors to meet the needs of today's capital markets. For more than 50 years, the annual seminars, hosted by the Deloitte Foundation and the American Accounting Association, have provided cutting-edge resources and hundreds of case studies that keep university faculty and their students connected to the real-world issues and challenges currently facing the audit and accounting professions.
"The auditors of the future are not siloed to financial reporting," said Tonie Leatherberry, principal, Deloitte Consulting LLP and president of the Deloitte Foundation. "Future auditors will need up-to-date technical and data science skills to go along with their deep industry and cross-functional expertise. Moreover, they will need to sharpen their analytical skills and ability to interpret data, and demonstrate strong business acumen, superior communication skills and leadership. The Trueblood Seminars continue a long-standing tradition of assisting those charged with developing curricula that is futuristic and embodies the spirit of innovation."
This year's seminars marked a continued focus on audit innovation as technology continues to change the face of the profession. The proliferation of data analytics and artificial intelligence has enhanced the audit process and has helped open the door to transforming the manner in which an audit is conducted. The result is a new type of auditor and deeper insights that can benefit companies being audited and provide value to capital market participants. Additionally, there is an appreciation among business leaders for the opportunities audits can provide to help companies improve business performance.
Participants analyzed case studies on leasing arrangements, accounting for cross-hedging instruments, business combinations, revenue recognition, and understanding and evaluating control deficiencies during an audit, among others.
"Case-based discussions are a critical component of the seminars because they present realistic, complex, and contextually rich situations that encourage critical thinking and professional judgment," said Michael Iselin, 2017 Trueblood co-chair and accounting professor at the University of Minnesota. "Faculty are able to return to their universities and use Trueblood case studies as an excellent tool to foster critical thinking skills in the classroom."
More than 2,100 professors from across the country are registered users of the Trueblood case studies.
The 2017 Trueblood Seminars were held at Deloitte University in Westlake, Texas. More than 60 leading accounting and auditing educators and professionals attended the February and March sessions. The program featured guest speakers from the Financial Accounting Standards Board, accounting professors from several colleges and universities, plus Deloitte subject matter leaders. Deloitte professionals also discussed innovative audit technology and approaches, and shared their experiences through the case studies to illustrate the evolving skillsets needed in the field.
"The skills required to complete a high-quality audit five to 10 years ago are not the same as the skills you need today," says Leatherberry. "It's an exciting time for educators to encourage tech-savvy audit professionals to join the wave of innovation as 'big picture' thinkers."
Through this lens, the Trueblood Seminars continue to give accounting and auditing professors curriculum resources they need to educate the auditors today's business world demands.
The Robert M. Trueblood Seminars have been held annually since 1966 under the auspices of the Deloitte Foundation. In 1975, the American Accounting Association joined the Deloitte Foundation in administering the seminars. Through the years, more than 2,400 professors have attended the program.
(Source: Deloitte)
