One of my clients is currently going through an external audit (I can hear the collective groans from here…..) and it is the usual thankless process of answering the long, almost never ending, list of queries from the auditor.
Audits seem to take up so much time and expense, but why is that? What if the process could be made less painful for all involved?
I guess there will always be the list of queries, after all it is difficult for an external person to understand how a company works, and to get to grips with finding and understanding the information they need.
Poor accounting systems and procedures can be one of the main challenges faced by both the auditor, and the company being audited, and this in turn can cause a lot of friction between the two parties.
To the company, it is frustrating, annoying, and sometimes embarrassing having someone pick apart your work; it feels personal so you get defensive and you start to make things a little more difficult for the auditor by being less helpful.
For the auditor, imagine trying to find the information you want when things are all over the place, and the person you rely on so you can do your job is being defensive? Do they start asking themselves ‘What are they trying to hide?’ and therefore dig a little deeper?
I’m not saying this is the same for every audit, but I think we could agree that it is the general consensus of how things can work, and the emotions people go through during the process.
Let’s face it, the better your accounting systems and procedures, the better for all involved. Your finance team spend less time answering queries, and the auditor can work faster, which in turn can save you money.
Ideally, your accounting systems should be digital, on a computer system, where they are easy to access, not necessarily on spreadsheet files that are password protected to within an inch of their lives, so no one but you can see them (trust me, I’ve seen this in action), or even worse…….
Like it or not, the Government and financial governing bodies are putting more emphasis on tightening up on accounting processes, with an emphasis on going digital; information needs to be accessible up to date, and most importantly transparent, or else there will be penalties to pay…..
In 2019, the Financial Reporting Council (FRC) released a report, which did not shine the best light on the auditing world:
“Audit quality is still not consistently reaching the necessary high standards expected.”FRC Report 2019
Insufficient challenging of management was a dominant finding highlighted in the report, along with a few other key areas.
Investors and stakeholders rely on accurate audits, and some recent high profile failures in the auditing world, including BHS, Patisserie Valerie and Carillion, have caused growing scrutiny of the processes involved. Guess where the scrutiny will be passed on to? Yep, you guessed it; you and your business.
Not every company is subject to an external audit, because there are criteria that have to be met in order to qualify. Basically, ‘small’ businesses are exempt, provided they meet two or more of these criteria:
- Turnover of the group must be less than £10.2 million;
- Gross assets of the group must be less than £5.1 million;
- Employees of the group must be less than 50;
- If the company is part of a group, then the group as a whole must meet the above criteria.
There are other criteria, but I don’t want to get too technical here; the best thing to do is check to see if your company qualifies as a small business.
If you do qualify as a small business, don’t get too relaxed, HMRC can audit your PAYE and National Insurance, or VAT at any time, with little notice.
It’s not just the auditing world that is getting more scrutiny; the Government have introduced Making Tax Digital, and IR35 will be coming into effect very soon, so there are less places for your piles of paper and outdated procedures to hide.
“HMRC’s ambition is to become one of the most digitally advanced tax administrations in the world….”HMRC Website
Sounds daunting doesn’t it; however, like most things, if you get into good habits now, it will help you in the long run.
It may seem too much of a challenge to change right now, but trust me, there is no better time than the present to get things in order; even a client can ask for an audit of their account with you. Just imagine being able to respond quickly and provide the information they want? Not only does it save you time and money, but it also makes you look professional.
Now is as good a time as any to get these good habits in place so that they become second nature, and you can react to any challenge quickly and efficiently.