THIS HAS been a tough year for the audit industry. For a start, it faces the prospect of being referred to the Competition Commission for an inquiry, which could result in reforms that would potentially transform the market for big company audits, and could even go as far as forcing a break-up of the Big Four audit firms.
On top of that, Accountancy Age’s Top 50+50 survey, which compiles a list of the country’s leading 100 accountancy firms, recently found that just two of the firms in the list’s top 10 have reported income growth in the past year.
However, relationships between finance directors, auditors and audit committees – which are traditionally seen as somewhat prickly, to say the least – appear to be fairly harmonious, despite the clouds hanging over the market.
This was the finding of a survey conducted by Financial Director in association with KPMG, which asked more than 100 FDs how happy they are with the service they receive from their auditors. The results of the survey indicated that 41% of respondents felt that their relationship with their auditors had improved over the past year, whereas only 12% felt that their auditor relationship had deteriorated during the same period.
This may seem surprising, considering the concession by one FD that the audit process, and the need for auditors, is often viewed as an irritating obligation by some.
“The audit process is a regulatory requirement and the need for auditors is therefore often seen as a necessary evil,” James MacLeod, finance director at Bodycare Toiletries, says in response to the survey on Financial Director’s LinkedIn group. “However, FDs should approach this process as a form of health check. If approached correctly, they can use the process as an extra pair of eyes to establish areas of improvement.”
Oliver Tant, head of audit at KPMG, understands why some FDs may view it in this way, but agrees that they will benefit from the open-minded approach taken by the likes of MacLeod.
“I think that, inevitably, there are individuals that are quite parochial. Some might take the view that it is a necessary evil because they don’t want the intrusion or because they don’t want a check-up on what they are doing,” Tant tells Financial Director. “Somebody who is happy to be transparent and is seen to take advice will be able to assure the market that they are doing their damnedest to better manage their processes.”
Moving up the agenda
However, there has been a change in what FDs are looking for in their auditor. Last year’s survey found that the most important qualities for which FDs looked in their auditors were the frequency and quality of interactions between the two parties. According to Tant, the benign market conditions – when compared with the turbulence of recent years – have meant that commercial issues have now moved up the agenda.
Frequency and quality of interaction is now only viewed as being an auditor’s most important quality by a quarter of FDs, whereas application of industry knowledge and competitive fees, which both received 32% of the vote, were seen as more important. Providing insight into different areas of the business also surged ahead, garnering 26%.
“Last year, the response was all about assurance. FDs were saying, ‘I have been spooked and need help and guidance around risk’. There was a higher sensitivity to the downside and now there is more focus on how audit can help with the upside,” explains Tant. “But given the developments of the last few weeks, these results may well revert if we were to survey again now.”
This change in focus is also reflected in the areas in which finance directors said they would most like to see improvement from their auditor. Insight into different areas of their business scored highest with 21.4%, while insight into emerging risk came second with 14.5%. But that is not to say that all FDs are clamouring for their auditors to give them market advice.
“I would rarely look to the audit team for advice on my business sector. You should know your market better than your auditors do. My advice is that the more open you are with the audit team, the more value you will get from the whole process,” says MacLeod.
Surprisingly, more than half of FDs responding to the survey said they are planning to increase their spend on control and assurance issues over the coming year, despite many finance directors’ response about what they value most: emphasis on commercial issues and a lessening of emphasis for assurance around risk.
Beyond the financial statement, the two areas over which FDs said they most wish to have higher levels of assurance remain compliance with regulatory bodies and compliance with HM Revenue & Customs. But Tant claims an increase in a company’s assurance spend can be reconciled with the prevailing emphasis on commercial issues by finance directors looking for assurance as a value-adding process.
“You look back at 2010 and finance directors wanted to understand the challenge that their businesses were facing. It was all about the quality of the assurance,” concludes Tant. “The results suggest that now there is appetite for assurance to be more about adding value and less about risk.”