Financial reporting in it's current state has been heavily criticised over recent months, especially when it comes to auditing. The future and work of the Big 4 auditors is often under great scrutiny.
Some big names have made the headlines recently for the wrong financial reasons. These particular cases, among others, have raised the concern about the durability and reliability of audits, which in these cases, failed to see and report potential or visible financial problems these companies were facing.
Our blog covers the current state of financial reporting in the UK, understanding why the current model in failing businesses and how we can change the model in order to bring better financial health to large corporations.
It’s time to stop box-ticking
In order for companies to pass an audit, they must meet the required criteria by a certain date, it’s not feasible to plan financially long term without having potentially severe consequences. Companies are too focussed on ticking the boxes, which is not improving company culture, warns the Financial Reporting Council.
Being compliant simply isn’t enough to get to the root of financial problems.
“Concentrating on achieving box-ticking compliance, at the expensive of effective governance and reporting, is paying lip service to the spirit of the code and does a disservice to the interests of shareholders and wider stakeholders, including the public,” said Jon Thompson, FRC chief executive in a Financial Times report.
Is it time to create a new, more robust model for the audit industry if we’re seeing audits failing to identify potential financial issues in companies, which in turn means they are failing a primary duty of theirs?
There has been a lack of scrutiny from certain companies, and too many in charge who were happy to take things at face value. Did lack of skill and knowledge cause the problem? Or did the ones in charge want to protect themselves from stakeholders and investors being aware of the company’s poor performance?
There is no doubt that human error had a part to play, but change needs to happen industry wide to help prevent this happening in the future.
How can we change the current model?
Automation would have a large role to play to help prevent and track these instances from happening. Not only to remove human error but allowing foresight and planning to prevent steps being overlooked and more accuracy in reporting.
From the report, Lord Brydon said he believed “audit is not broken but it has lost its way”, also recommended views on how the model can be changed. Including auditor transparency, targeting corporate fraud and shareholders holding power to question auditors for their AGMs.
Lord Brydon also believes that auditing should take public interest into account opposed to taking a box ticking approach to the financial statements.
It’s widely anticipated that Lord Brydon’s report may help to shape the audit industry going forward.
It’s clear to see from many cases that a new financial reporting model is required when it comes to auditing.
TO FIND OUT MORE ABOUT THE BRYDON REPORT AND THE ROLE TECHNOLOGY WILL PLAY IN THE FUTURE OF AUDITS – DOWNLOAD OUR LATEST EBOOK