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A fresh pair of eyes

Guy Strafford
Dec 1, 2014 10:00:00 AM

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Guy Strafford: A fresh pair of eyes

The traditional way to explain the role of an auditor is that they’re a watchdog, not a bloodhound. They keep an eye on what’s happening, sit up when something looks suspicious and occasionally bark when they see something dodgy. The job is explicitly not turning over every rock they can find to test ethics or legality - no bloodhounds chasing the bad guys through the woods here.

But that traditional explanation is also very limiting. Shouldn’t there be a third option? Even the “watchdog” tag suggests that the statutory auditor is a kind of pseudo-regulator, one whose presence is an encumbrance, and who should be treated with mild suspicion. After all, they want to see the CFO’s workings - like some kind of exam invigilator. Their feedback is often, at best, “you’ve passed” - and, at worst, grassing you up to the headmaster.

(That rather binary outcome for audit reports has been the subject of much hand-wringing among accountancy professionals for years.)

What might a third option be? Well, it’s clearly not an adviser. We’ve been there before - most notoriously with Enron, and we know how that worked out. Shareholders would rightly lack reassurance from an exam invigilator who turned out to be the personal tutor of the pupil turning in their paper.

But there is a happy medium. And we know this because finance directors (FDs) and CFOs say so. The annual FDs’ Satisfaction Survey (supported by the CBI and ICAEW) includes a section on auditors. And each year the stand-out partners are praised for their ability to suggest appropriate treatments, pick up on things that might be re-examined or point out issues with processes or systems within the client finance function.

In other words, they bring a fresh pair of eyes to a whole series of complex issues that even the most diligent CFO might have overlooked. This isn’t about offering advice or prescribing certain accounting treatments or reporting tricks - that’s very much outside the scope of the new regulations (and even some of the older ones) for statutory audit. It’s more like a helpful classroom assistant suggesting how to tackle your homework than an exam invigilator handing out the answers.

That’s important: quite apart from sticking to the new audit regulations (see also…), the auditor/CFO relationship has to smell right to the shareholders - and their proxy, the audit committee. But that audit committee also has a duty to ensure the relationship is working well - that the auditor’s brief needs to be that “fresh set of eyes”, not just a pseudo-regulator that the operational people resent.

(That’s the other lesson from CFO feedback in the FDs’ Satisfaction Survey: bad auditors suck away finance function time, increase stress and generally make everyone grumpy. A good tender can help ensure that doesn’t happen.)

That’s why their whole conception of the role and value of statutory audit needs to be progressive; and why audit committees need to tender for audit services in a sharp and creative way. The brief they establish at the very beginning of the relationship sets the tone for the service being bought. To reiterate: it’s not about creating an atmosphere that suggests cosiness between auditor, audit committee and CFO. It’s about ensuring when issues crop up, they don’t trigger a witch-hunt or defensiveness from any point on that triangle. “Sticking to the basics” might be a great way for an auditor to avoid trouble - but it’s hardly adding value.

Nothing in that brief should compromise the statutory auditor’s watchdog duties - we’re hardly short of recent examples where perhaps the auditor might have done better at barking loudly when things felt suspect. But ensuring that the output of the audit includes appropriate and informed nudges about doing better next time? That really ought to be part of the package.

Proxima has published a report with five key recommendations for maximising the audit tender process – essential reading for every audit committee chairperson, CFO and non-executive director. Download your copy here.

If you have any thoughts or comments, please add them below.

Proxima Best Practices Guide to Audit

Guy Strafford

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