The financial reporting landscape has come under heavy criticism in recent months – particularly when it comes to auditing, the work and future of the Big 4 auditors often coming under the greatest scrutiny.
Pizza Express and Thomas Cook are some of the biggest names to have hit the news for all the wrong financial reasons. But what these cases have also raised is concern about the robustness and reliability of audits, which seemingly failed to recognise or report any financial problems in these companies.
This blog will look at the state of financial reporting in the UK, looking at why the current model is failing business and what can change to better the financial health of large corporations.
It’s time to stop box-ticking
Financial reporting can now largely be attributed to a series of box ticking.
To pass an audit, one must simply meet the criteria listed in the process on the given date; approaching long term financial planning like this is a disastrous tactic. The Financial Reporting Council says businesses focus on box-ticking is not improving company culture. And it’s plain to see.
Achieving compliance between corporates and governance 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.
If audits are failing to identify underlying financial issues then they are failing in one of their primary duties, and it is time to create a new – more robust – model for the audit industry.
A case in point
Looking at Pizza Express, its accounts were signed off by auditors even though its debts were greater than its assets. By the time it called in advisors, Pizza Express had losses of £55m a year (on recorded sales of £543m).
Again, Thomas Cook’s accounts were filled with positive earnings at the beginning, and it wasn’t until you get deep into the accounts that you started to see that things just weren’t right.
There was a lack of scrutiny, it seems, of the reporting and too many people in charge were seemingly willing to just take things at face value. Is this because businesses want to protect themselves from their investors and stakeholders potentially finding out worrying news about poor performance? Or is it simply down to a lack of reporting skill and knowledge causing the problems?
Human error is no doubt at play for some of the issues but there is a deeper industry-wide change that needs to happen.
What can be altered in the current model?
There’s no denying the role of automation could play a huge significance in helping track and even prevent such serious discrepancies from happening. In not only helping remove human error, it allows foresight and planning that can prevent steps being missed and accuracy in reporting.
From the outcome of the Brydon report, Lord Brydon said he believed “audit is not broken but it has lost its way”, and recommended a number of ways to help change the model. These include auditor transparency, targeting corporate fraud and further powers for shareholders to grill auditors at annual investor meetings.
Lord Brydon also echoed the sentiments mentioned above that auditing should take public interest into account rather than applying a tick-box approach to financial statements.
It is widely expected that the findings in Lord Brydon’s report are going to shape reforms of the audit industry.
But whatever the case, it is clear that there is a need for a new financial reporting model when it comes to auditing.
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