Auditing scandals are on the rise: What needs to change?

The role of auditors has been hitting the headlines again. Firstly, with the UK competition watchdog threatening firms with extra reforms, and secondly, with the UK audit regulator sending letters to the leaders of the Big Four to outline plans to break them up. It’s no secret that a number of high-profile companies have recently found themselves in hot water following investigations into their financial practices – with most pointing the blame at auditors. And while they have their part to play, they are not solely responsible. The financial practices of these businesses also need to be properly assessed to identify how and why these issues are becoming so prevalent. Only by bringing all parties together can businesses start to get a full picture of why and how errors are being made, and understand how to stop them. Auditors at error Auditors are not getting it wrong because they are too lazy to notice mistakes, but because auditing in general has become much harder to do. Assets off balance sheets continue to rise, there’s infinitely more data to handle and businesses are moving faster to keep pace with an increasingly volatile socio-economic climate. On top of that, accounting treatments are getting so complex that they are muddying the water rather than clearing it. The solution could involve using intelligent algorithms and analytics technology, which would allow management and auditors to start monitoring accounts in real-time and spot issues and errors more quickly and reliably than humans could. It could be argued that many of the high-profile collapses we have seen recently could have been avoided if internal management teams had better management information (MI). In order to improve audits, there needs to be better integration of MI, statutory reporting and assurance. This would allow management teams to spot problems sooner and be able to make adjustments before it is too late. This would greatly impact the quality of the audit too. Patisserie Valerie proves this point: the funding gap was so large that it amounted to the equivalent of nearly a year’s worth of pre-tax profits. Had the Executive Chairman had a comprehensive view of all the reporting, it’s likely that they would have spotted the blackhole in funding before the problem even reached Grant Thornton, who went on to shoulder the blame for a ‘poor audit’. This, therefore, leads us on to the next question - what should businesses be doing? Integrating reporting to address issues The use of intelligent algorithms have a big role to play in addressing auditing issues. Finance teams and auditors would be able to see, in real-time, how the business is performing, and any issues or errors will be brought to the surface more quickly and easily. This use of technology also allows for significant integration of the management and financial accounts, which also make it harder for problems to remain hidden for so long. The problem is that as it currently stands, the integration between internal and external accounts is poor and audit is currently treated as an entirely separate process. With three often siloed processes running at different times to produce management information, statutory reports and assurance that the numbers are correct, problems become engrained and harder to unravel. Improving audit, therefore, involves integrating the process of management information, statutory reporting and assurance so that issues are resolved as and when they arise. Without a doubt, the increase in accounting errors, like those seen at Patisserie Valerie and Carillion, uncover audit failings, but they also show that management did not have a good enough grasp of underlying business performance to test the accounts. This is exacerbated by increasingly complex accounting treatments and poor integration of reporting. Technologies will help finance teams focus on providing management with valuable insights, since sophisticated algorithms will do the ‘bean counting’ for them. It and will also enable auditors to spot issues before they develop further. When firms can achieve this, they are far less likely to fall foul of the sort of issues that have led to several high-profile company administrations. But if the industry continues to ignore these problems, history will only repeat itself. Simon Bittlestone, CEO of Metapraxis