The Annual Audit: Making a Case to Embrace It
by Stephen F. McCarthy, CPA, The Presidents Forum –
June 11, 2018
The annual audit is often perceived as a burden, perhaps even a threat, at many companies. The potential to uncover weaknesses or shortcomings is never pleasant. However, in adopting this risk-averse mindset, many opportunities can be lost. The annual audit offers an opportunity for organizations and auditors to enhance a good working relationship. More importantly, an audit presents an opportunity to gain valuable insights into the business, identify efficiencies and clarify opportunities for growth.
How then do those who oversee auditors — CFOs and audit committees — manage the process to achieve value-added benefits? How can they set themselves up for success? The answer to that lies in focusing on the three things organizations generally want from auditors: quality, superior value and risk reduction. Let’s assume that risk reduction is already built into the audit process and focus on quality and superior value.
Quality: The Selection of the Auditor
A new study by the AICPA Peer Review team revealed a set of factors that has strong correlation with audit quality. To ensure quality, according to the Center for Audit Quality (CAQ), the audit committee must be very careful in selecting an audit partner. It is critical to thoroughly examine an audit partner’s qualifications and engagement experience within the specific industry. And it is crucial that the audit partner for the engagement is the lead engagement partner on similar audits. This seems like common sense, but it can be all too easy to take shortcuts or make assumptions in the selection process.
Ensuring Superior Value: Setting Expectations in the Audit Planning Stage
The audit committee or CFO must meet with the auditors well before the audit to discuss the auditors’ responsibilities and provide input into the scope of work. At this stage, it is important to encourage collaboration and innovative approaches in the audit. And this is when value-added enhancements or services should be discussed. Some examples to consider include information system reliability, risk assessment, performance measurement, updating policies, strategies for long-term prosperity and various data visualization techniques to present data in new and compelling ways. Perhaps the most important step: ask the auditors themselves to make suggestions. A good auditor will have relevant experience with other clients, which they may be able to share. There are numerous ways an auditor can add value, while still maintaining professional requirements related to independence.
Art Glass, CFO of Mount Saint Mary College in Newburgh, NY, suggests the following tips to manage an audit to provide value-added benefits.
- Keeping the organization informed of changes to GAAP and proposed changes to GAAP under consideration;
- Providing information about other similar organizations and how they are implementing GAAP changes and reporting;
- Providing comparative data from other organizations that add value to decision making;
- Acting as an additional set of eyes and ears to aid in effective financial management and internal controls.
Glass believes good auditors have a global perspective of the organization and therefore can make valid objective recommendations.
Added Value May Not Be Related to the Audit
Glass mentioned changes to GAAP as an area where educational benefits may flow from an audit beyond audit observations. The Financial Accounting Standards Board (FASB) issued an Accounting Standards Update in August 2016: (ASU) No. 2016-14, effective December 15, 2017.
The key areas of the financial statement that will be impacted by this new standard include the following:
- Net asset classifications
- Required liquidity disclosures
- Investment return reporting
- Statement of cash flows presentation
- Functional expense reporting
Insight on new standards is just one example of the way auditors can add value in the form of client education.
One last idea on delivering value, as Glass stated above, is to provide comparative data from other organizations. Auditors have substantial information on industry trends and benchmarks. Without divulging confidential information, auditors can provide this data in a way that helps enhance decision making.
To summarize, overseeing external auditors is the responsibility of the board, audit committee and the CFO. Realizing high quality, superior value and risk reduction can be a challenge. For some, the requirements related to the audit are burdensome and part of an over-regulated environment. Nevertheless, the auditors’ report provides a comfort level for stakeholders. Moreover, in today’s challenging environment, obtaining added value is highly advisable. And therefore, a related objective should be to embrace feedback and act both promptly and wisely. If one thinks about financial statements as providing information for the company and its stakeholders to make better decisions, then the results and benefits of a superior audit can be beneficial for all.
Stephen F. McCarthy
Stephen F. McCarthy, CPA, CGMA, M.B.A., is the owner of The Presidents Forum. He is a member of the NJCPA and can be reached at email@example.com.
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This article appeared in the May/June 2018 issue of New Jersey CPA magazine. Read the full issue.