Monday 27 June, 2005
Audit is an important component of business corporate
governance and the risk management process, and can add real value to
any organisation.
In 2004 the CLERP 9 reforms focused on audit and corporate governance.
These law reforms demonstrated the importance regulators place on an
independent examination of financial information. Regulators consider
financial information is significant for economic decision-making and
therefore the quality of that information impacts on the quality of the
decisions made. Good quality decisions are considered good for the
economy as a whole.
A generally accepted view is that audited financial information is of higher quality than unaudited financial information. In our experience audited companies are generally better managed than unaudited companies. Audits enforces a discipline within the finance area, and add value to a business that is in the process of being sold or raising equity funds by giving integrity to the numbers.
However, whether an audit is viewed as a value-adding process, or whether it is considered to be simply a matter of compliance, depends on the significance that company managers and shareholders associate with the function.
An audit will also review the adequacy of books and records, required by the Corporation Act 2001. ASIC recently took action against 29 directors and two corporations, with fines in excess of $88,000 for failures by company officers to provide information about the company's finances and history, and for failing to update ASIC’s public registers with changes to company details. These details should be identified during an audit.
The audit process also provides an opportunity for an independent review of internal controls including an independent assessment of the risk of fraud.
As the regulators increase their surveillance activity, with particular attention to directors’ fiduciary duties, this independent review may be important for identifying material deficiencies in the control environment that need to be fixed.
However, an independent examination of business processes and financial information provides far more than regulatory compliance. If there are material weaknesses in the internal control structure it is likely that related business processes are not operating at an optimal level, and control processes may not be effective or efficient. It is also likely that risks are not being adequately identified or controlled. All such deficiencies will contribute to less than optimal performance and results.
Directors are often fully occupied in day-to-day operations and may not have sufficient time to step back and appraise the (sometimes ad hoc) development of internal processes. An independent examination by a fresh set of eyes, with experience across a broad range of businesses, is often extremely useful. An external audit will assist in identifying risk, providing recommendations for improvement, ensuring regulatory compliance, and will support sound decision-making through the provision of quality financial information.
Source:ceoonline.com
A generally accepted view is that audited financial information is of higher quality than unaudited financial information. In our experience audited companies are generally better managed than unaudited companies. Audits enforces a discipline within the finance area, and add value to a business that is in the process of being sold or raising equity funds by giving integrity to the numbers.
However, whether an audit is viewed as a value-adding process, or whether it is considered to be simply a matter of compliance, depends on the significance that company managers and shareholders associate with the function.
Why have an audit?
When the Corporations Law was amended in 1995 to require all large proprietary companies to have an audit, 57% of those large proprietary companies (that were not subsidiaries of public companies) were already having annual audits by choice. Research carried out by Pitcher Partners and the Australian Institute of Company Directors in 2004 revealed that from a sample of 155 companies selected from the AICD database:- 61.9% were required to have a statutory audit
- 13.6% had obtained exemptions for audit
- 22.6% were audited by choice
Implications of not auditing
Compliance is only a starting point. We have several experiences of new clients who came with unaudited financial reports suggesting that they were reasonably profitable, but without a sense of success in their business dealings. When we completed an audit on these clients, the audit has often revealed a lack of adequate provisioning which has resulted in turning a healthy profit into a significant loss. Despite the disappointing outcome, the audit provided a timely opportunity for the company to seek financial assistance, address loss-making activities and recover from a downward spiral before it became too late.An audit will also review the adequacy of books and records, required by the Corporation Act 2001. ASIC recently took action against 29 directors and two corporations, with fines in excess of $88,000 for failures by company officers to provide information about the company's finances and history, and for failing to update ASIC’s public registers with changes to company details. These details should be identified during an audit.
The audit process also provides an opportunity for an independent review of internal controls including an independent assessment of the risk of fraud.
As the regulators increase their surveillance activity, with particular attention to directors’ fiduciary duties, this independent review may be important for identifying material deficiencies in the control environment that need to be fixed.
However, an independent examination of business processes and financial information provides far more than regulatory compliance. If there are material weaknesses in the internal control structure it is likely that related business processes are not operating at an optimal level, and control processes may not be effective or efficient. It is also likely that risks are not being adequately identified or controlled. All such deficiencies will contribute to less than optimal performance and results.
Independent audits add value
Independent audit is a key function of corporate governance. Corporate governance is the system by which companies are directed and managed. It influences the achievement of business goals, it monitors risk and it achieves optimal performance. Corporate governance processes are clearly defined for listed companies and include the audit committee’s interaction with external audit. However, external audit is just as important for growing proprietary companies.Directors are often fully occupied in day-to-day operations and may not have sufficient time to step back and appraise the (sometimes ad hoc) development of internal processes. An independent examination by a fresh set of eyes, with experience across a broad range of businesses, is often extremely useful. An external audit will assist in identifying risk, providing recommendations for improvement, ensuring regulatory compliance, and will support sound decision-making through the provision of quality financial information.
Source:ceoonline.com
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