Most management teams operate with well-tried systems delivering daily reports of all key aspects of their operations. This allows them to spot emerging trends that could be of concern, assess actual results against forecasts and generally keep control of even the most complex operations. Charter Partners have found that those without robust systems in place are at serious risk of missing key indicators that could alert them to potential problems before they occur.
In this challenging environment, an external audit is one of the most important tools available to management. Put simply, the audit process compares what should be happening against what is happening and reports on the differences.
These differences usually involve lapses in existing processes, procedures with loopholes that invite mistakes or deliberate wrongdoing, or gaps where new procedures are needed. There may be regulatory changes that management is unaware of or a strengthening of accounting standards requiring system updates or complete new systems.
Risks common to all businesses regularly appear on audit reports. The controls around cash handling, for example, are much the same in the accounts section of every business. The interesting thing is that poor monitoring of petty cash and temporary entitlements such as travelling expenses are an indicator that much more serious issues are likely to be found in other areas. The theory is that if these two simple functions are uncontrolled then other, more potentially damaging issues will be lurking in the accounts.
Purchasing and stock control are also areas where lax processes and sloppy record keeping provide an opportunity for dishonest staff or management to help themselves to company property without being caught. Left unchecked, this situation can become severe enough to threaten profitability. It is an area where a diligent and observant auditor can soon uncover discrepancies between the records and the stock-on-hand.
Audits are not confined to daily processes like accounts receivable and accounts payable but includes other potential risks like inadequate insurance cover. Auditors examine the certificates of currency from the insurers, the type of insurance and the level of cover. Struggling businesses are sometimes tempted to under-insure to reduce expenses. This greatly increases the risk of total loss in a fire or a faulty product recall situation.
Auditors examine the liquidity position of a business and report if there is a risk of it becoming insolvent. They may examine the role of directors, and request documentation such as delegations of authority to ensure that the people making critical decisions have the authority to do so.
Audit reports have credibility because they are independent and unbiased. There is no hidden agenda when audits are performed by people bound by standards of ethical behaviour, and whose qualifications are universally recognised and acknowledged.
An audit report that highlights issues of concern is only a problem for a management unwilling to take steps to close the gap between what should be and what is. To all other managements, it is a golden opportunity to improve processes, update systems, reduce risks and move forward with a better performing business.