The Value of an Audit

Written by Paul Windsor on 28 January 2015

Auditors seem to hit the headlines on a regular basis. This week, it’s the auditors of failed courier company City Link; at the end of last year it was the auditors of Tesco, PWC, who failed to report on the financial 'black hole' in their accounts. The failure of Enron over a decade ago, brought down one of the then 'big five' audit firms, Arthur Anderson.

Following the banking crisis and the collapse of Lehman Brothers; the Financial Reporting Council (FRC) asked Lord Sharman to undertake a review and consultation on the nature of 'going concern assessments' and their disclosure in financial statements by the auditors. His recommendations were published in 2012, but the FRC struggled to implement them or agree on a clear definition of the meaning of 'going concern'.

It seems that the debate is still relevant as, according to director Jon Moulton, the auditors accepted the assurances from the City Link board that there would be financial support over the next 12 months. However, within weeks of signing off their report, the company collapsed.

So does the audit report really have any relevance or meaning to investors, creditors, employees or other users of the financial statements, or is it simply an irrelevant report required to comply with the law?

Over the last decade, the number of firms of Chartered Accountants registered to undertake audit work has dropped by over 42% from 6,478 firms in 2002, to 3,728 firms in 2012. This is mainly a result of the reduced requirement for audits of small private companies and indeed the threshold below which an audit is required is due to rise again, potentially eliminating the need for some medium sized companies to be audited.

I still believe that people (and their companies) have a natural tendency to what is inspected rather than what is expected and the audit does provide a vital external check on the financial strength and viability of an organisation. So many customers, employees, investors and creditors place trust and reliance on companies to deliver goods and pay salaries, invoices and dividends that, frankly, an annual audit by an independent watchdog is something that we should all welcome.