Every business leader and audit committee member wants their audit to go as smoothly as possible. And they deserve no less. Delays in an audit cost companies time and sometimes money. Audit committees need to fulfil their governance roles yet still meet filing deadlines.
If only the business climate—and the related financial reporting requirements—cooperated more. Accounting can be very complex, and this impacts audits.
Yet companies can still simplify their audit. To ease the audit process and still maintain sound governance, management and audit committees should consider following a few easy steps.
Why has accounting become more complex?
There are three main reasons financial reporting is getting more and more complex.
First, there’s the accounting standards themselves. Three critical and complex accounting standards went into effect in the past few years—on financial instruments, revenue from contracts, and leases. In 2023, an additional standard will come into effect, this one dealing with reporting for insurance. And companies should expect even more changes to standards. The International Accounting Standards Board has several projects on the go that will change financial reporting for companies.
Second, technology has changed the way companies operate. With new ways of doing business and new types of transactions, financial reporting needs to adapt. Accounting professionals are analyzing how to properly account for new business realities.
Finally, the COVID-19 pandemic has created novel financial reporting scenarios. Between the financial challenges and the response by companies and governments, the current business environment has raised issues that many seasoned accounting professionals have never seen.
Is it management’s job to solve for complex accounting?
While the auditor reviews complex accounting issues as part of their audit, it is not an auditor’s job to do that accounting. Preparation of the financial statements, including complex accounting, is the responsibility of management and should be addressed before the auditor gets involved.
In fact, the independence requirements for auditors prohibit a listed entity’s auditors from providing accounting support to the entity on complex transactions. It’s not just the auditor who is responsible for ensuring audit independence rules are respected—the responsibility is shared by an entity’s auditors, management, and audit committee. If it is determined that the independence standards have been breached, the company may need to retain new auditors and get their financial statements re-audited (they are technically considered not to have been audited).
Providing an auditor with a robust analysis also allows the auditor to consider all evidence and challenge the accounting and related disclosures. This can raise the calibre of information the company provides to users of its financial statements. When auditors are too involved in the accounting analysis, an independence threat is created. This is known as a self-review threat and undermines an auditor’s ability to conduct a robust and quality audit.
How to simplify the audit process
Management, audit committees, and auditors can work together to make an audit go more smoothly. When faced with complex accounting, follow these tips to simplify your audit:
- Assess your internal resources. The audit committee should initiate open and frank conversations with management and the auditor on the capacity and capabilities of the internal finance team in addressing complex accounting. Today’s lean finance teams may not have the bandwidth or experience to deal with many complex accounting issues. This includes identifying the types of transactions that will require additional accounting assistance.
- Locate external accounting support. Identify accounting advisory resources outside the company that management can reach out to when needed. Ideally, arrange with the advisor before the need arises, so you will already have a team in place and don’t need to delay the audit. Your auditors can help in referring you to accounting advisory resources they have worked with in the past.
- Have the conversation early. The audit committee should be asking management about these complex scenarios early in the process. This will help them stay current on how management and the auditors are managing the risks related to complex accounting.
- Deal with complexity when it arises. Get your accounting advisor to complete the analysis before bringing in the auditor, and have your auditor review this work to make sure they concur with the conclusion reached. This will lead to smoother audits and quarterly reviews, as the complex issues will already have been handled.