Auditing can mean either pain or gain

By Ian Fraser

The Herald

March 12th, 2007

Image courtesy of Businessweek

Many small and medium-sized enterprises (SMEs) regard their annual audit as an expensive and time-consuming chore that brings them little of value, while only one-third carries out an audit because it is a statutory requirement.

However, companies with this blinkered approach are unlikely to generate much value in terms of fresh insights about their business from their audits, according to a recent survey of SMEs by KPMG.

The importance of auditing has been rising up the corporate agenda because of the Sarbanes-Oxley act enacted by the US following the Enron scandal and the Financial Reporting Council-sponsored Oxera review. Traditionally, auditing has been viewed as a tedious number-crunching process, but it is increasingly being seen as one of the central cogs which drive financial markets.

Under UK legislation, only companies with a turnover of less than £5.6m and gross assets of less than £2.8m are exempt from doing an audit.

Lorraine Bennett, KPMG’s head of audit in Scotland, said: “Strong and open relationships between a company and its auditors are absolutely key. Without that, the audit is unlikely to produce the sort of far-reaching benefits it is capable of producing.

“However, our research suggests that SME companies fall into two roughly equal camps: those that are getting real value, and those that are not. Companies need to ask themselves which half they are in, and whether they need to take action accordingly.”

KPMG briefed Opinion Leader Research to question companies across the UK with annual sales in the £50m-to-£150m range on their views of audit. Some 56% of the 200 respondents said they view the audit as a routine chore that is the same from one year to the next, with only 40% saying it resulted in recommendations and learning that were useful to their businesses.

Nearly two-thirds of respondents recognised the value of an audit, to the extent they would do one even if it was not a statutory requirement.

Bennett said she was “encouraged” that 70% said that their audit firm is prepared to challenge them on the way their numbers are interpreted or presented.

However, what worries Bennett is that nearly half of respondents said that they only occasionally or never meet with their auditors outside the traditional audit season. This was despite the fact that nearly two-thirds acknowledged there is a link between the strength of their relationship with their auditors and the value they can derive from it.

On average, respondents said auditors spend two weeks on site during the audit season, with the accounts being signed off within 97 days of the company’s year-end. Even though speed of sign-off was seen as important by more than 60% of companies, the difficulties of achieving this were highlighted by the limited resources of most SMEs.

On average, just five people in their internal finance teams were involved in putting together final results. More than two-thirds (68%) of companies said they had no audit committee.

Another key finding related to International Financial Reporting Standards. The International Accounting Standards Board recently issued a draft version of IFRS for SMEs. KPMG’s research revealed that 71% of companies believe they need simplified versions of IFRS.

However, two-thirds doubted whether even a simplified IFRS would make communicating their performance to shareholders easier.

Bennett said: “Some companies are clearly maximising the value of the audit to gain insights into the efficiency of the company as a whole; others however, are not.

“Some companies may be surprised how much extra value they can derive from the audit if they establish the right kind of working relationship with their audit firm. The challenge for us the profession is to work with firms to ensure they get the value they are looking for.”

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