auditors, accountants and businesses need to agree on expectations and deliverables in audits.
by alan anderson
transforming audit for the future
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“the new manifesto for accountants.“
do the banks and investors get useful information from historical audited financials? in their book, “the end of accounting and the path forward for investors and managers,” baruch lev and feng gu researched the relationship between changes in stock prices and the dates that corporate financial reports were released.
more: three fundamental questions to ask in audit | how auditors can beat ai | the big issues in audit: frustration, inconsistency and technology | five ways to increase audit efficiency | early adopters gain an edge in audit | talent retention: five tips for an audit adjustment | six benefits of an internal audit | the ten financial controls that’ll make you a hero | five cash reports you can’t live without | when an audit is a great thing
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in the 1950s and 1960s, roughly 90 percent of the market value of public companies could be directly attributed to the earnings and book value reported in their financials. by 2013, that percentage had dropped to just 50 percent. personally, i’m surprised it’s even that high. the historical financial statement does not serve the needs of the users of those statements.
the entire profession of stock and investment analysts arose because the audit community did not leverage the opportunity to become the trusted resource for investors. while auditors do perform analysis, they rarely take that analysis beyond the numbers recorded in the financials.
when auditors are presented with an opportunity, by the time they’ve analyzed it sufficiently, the opportunity is gone. sometimes you just don’t have the time to analyze it to death
auditors placed themselves firmly in the box of auditing historical financial statements, not in performing the analysis that decision-makers need. because investors needed information that audited financial statements were not providing, the analyst community developed. because they had no paradigm of what should be analyzed, they started looking at relationships between financial and non-financial data. they looked at what was happening in the business and the world at large and what might be happening in the future.
our profession lost that opportunity that was there for us. a ceo of a company once told me, “when auditors are presented with an opportunity, by the time they’ve analyzed it sufficiently, the opportunity is gone. sometimes you just don’t have the time to analyze it to death.”
more recently, a survey by ey of cfos and controllers around the world found that in the wake of the coronavirus pandemic, stakeholders were increasingly looking for insights “beyond the numbers.” a full two-thirds of respondents said the demand for “forward-looking financial analyses and forecasts” had increased over the previous 12 months. the financial leaders surveyed echoed what lev and gu described in “the end of accounting”: 65 percent of respondents in the ey survey said, “there is significant value for our organization that is not measured or communicated using traditional financial kpis, such as brand value and human capital.”
this disconnect between the value of audited financials and stakeholder interests is nothing new. in the wake of the 2008 financial crisis, steve goldstein at marketwatch had this to say: “what precise purpose does it serve to have a supposedly independent auditor (paid for by the company) sign off on accounts? from enron to lehman to satyam to parmalat, it’s clear that the major accountants lack either the skill or the determination (or both) to ferret out fraud.”
auditors, when asked, have a difficult time explaining what an audit is all about. it has been my experience that the auditor spends the majority of the time explaining what an audit is “not” versus what the audit “is” when asked about the goal of the audit. for example, they will quickly say an audit is not absolute assurance that the numbers are correct, and the opinion is not a guarantee and so on.
so to recap:
- most companies only get an audit because they are required to have one.
- users of the audited financial statements say the audit doesn’t provide valuable information.
- and the auditor cannot effectively explain what an audit is all about.
no wonder we are in a crisis with audits if the parties can’t agree on what an audit actually is.
one response to “is audit in crisis because of definitions?”
frank stitely
great article – this has been the case in my 34 years in the profession. we are always chasing the elusive client / regulator understanding of what’s possible versus what they want. ultimately clients and regulators want a two-word audit opinion. “good investment” or “bad investment.”