Why the fuss about audit independence?
As regulations tighten over auditor independence, questions remain over how best to restore trust in the audit profession.
Would greater independence have prevented high profile failures like BHS, Carillion and Patisserie Valerie?
Will the forthcoming new regulations make any difference?
Why is independence important?
Firstly, it’s important to define what an audit is. For many of us, the main contact with auditors is during the annual audit of a company’s financial statements, or where internal auditors are examining systems and processes within our organisation.
In brief, an audit can be summarised as an in-depth examination of a set of records, both financial and non-financial, to ensure that they can be relied upon in terms of accuracy and completeness.
When is an independent audit required?
In the UK, the directors of active companies are required to prepare and file annual financial statements that show a true and fair view. The independent statutory auditor will form an opinion as to whether the financial statements do indeed show a true and fair view, and both the auditor’s opinion and financial statements will be made publicly available. For many companies an independent audit is a statutory requirement because of the nature or size of their business.
All publicly-held companies or those involved with insurance or banking are required to file statutory accounts with an independent audit opinion, as are companies which meet two of the following criteria:
- An annual turnover of more than £10.2 million
- Assets of more than £5.1 million
- An average of more than 50 employees
However, there are a variety of other circumstances where an independent audit may be required. It may be a condition of a company’s governing documents or a requirement as part of grant funding. For charities, because the public’s money is involved the thresholds are a lot lower at £1m of turnover. In the case of public sector bodies there are wide ranging requirements for independent audits to ensure that public money is well spent.
Does independence really matter?
In short, yes. Credible and reliable financial information is essential to the financial system which supports our daily lives and audit is a key part of ensuring standards are maintained. Whether internal or external, the audit process requires a high degree of integrity and an objective approach. Many business owners voluntarily opt for an external audit of their annual financial statements for their own peace of mind and to demonstrate publicly they are presenting reliable financial information. Private, public and charitable sector organisations will seek bespoke audit exercises to obtain that reassurance over their organisation of systems, client money and operational processes.
The benefits of an independent audit go far beyond compliance and can highlight where and why errors or discrepancies are occurring in your business finances and, in a worst-case scenario, reveal where systems are going very wrong.
As auditors, this means we sometimes have to raise issues that clients do not want to discuss, but this is where our independence can be a source of strength for your business and play a vital role in the welfare of your entire operation. These are sometimes difficult discussions. For example, we may need to document a longstanding trusted employee whose circumstances have changed and who can no longer cope with their role, or a system implemented by one of the directors which may have been overtaken by technology, or key controls which the directors thought were in place and in fact have fallen by the wayside, especially in lockdown. Often it is difficult to tackle these issues internally and before they have become a major problem which threatens the health of the organisation.
So is it ever going to be a case of life or death….?
One of the most high-profile – and perhaps most extreme – cases of where an independent external audit could possibly have significantly changed the fortunes of an organisation and its staff was the Post Office Horizon scandal. If an independent assessment has been sought and followed much earlier, the many sub-postmasters would not have lost their livelihoods and, in one case, their life.
False cases of embezzlement leaving people with nowhere to turn
Friday 23 April 2021 was a landmark date for 39 former Post Office sub-postmasters, when the High Court in London quashed their convictions for fraud and false accounting. This brought to an end a period of anxiety and humiliation that had lasted for over 20 years, but could have been avoided by a careful, independent examination of the figures and systems.
In 1999, the Post Office Ltd installed the Horizon software across 18,000 branches to handle accounting, stocktaking and transactions. However, within a year, serious and unexplained discrepancies in the figures started to emerge. Those raising concerns not taken seriously, and one sub-postmaster in North Wales found his contract was terminated after he made complaints.
Over the next 15 years, a total of 736 regional sub-postmasters suffered major discrepancies in their figures and were accused of theft. The amounts in question ranged from anywhere between £6,000 to £75,000.
People were taken to court and often given custodial sentences. Many pleaded guilty just to avoid prison and some remortgaged their homes to come up with the money they had ‘stolen’. It wasn’t until 2012 that an external auditor was brought in, and while they found several problems with the Horizon system, the Post Office terminated their contract a day before they were due to publish their official report in 2014, stating that issues had been fixed.
It wasn’t until a further investigation in 2018 revealed the huge number of communication failures and software defects, and the Justice For Subpostmasters Alliance went to court in a group action for 555 claimants – which the Post Office settled in 2019, paying £57.75m in damages – that the truth emerged. The recent High Court ruling in April 2021 finally brought justice to those sub-postmasters with convictions, but tragically this was too late for one who committed suicide in 2013. There were many others where stress contributed to ill health and their early deaths, and many more whose marriages and livelihoods were ruined. It is arguable that much of this could have been avoided if the defects in the Horizon software causing the figures to go seriously awry had been independently investigated by an external auditor and dealt with appropriately by the Post Office two decades previously.
Why an independent audit is important
Anyone with a vested interest in a company will (at the very least) have an unconscious bias towards the figures and the company’s systems. They may feel unable to voice misgivings about the accounts or staff behaviours, and might even try to hide uncomfortable facts.
An independent auditor is in a far better position to challenge management and consider the facts objectively. As well as helping you meet your compliance obligations and demonstrating good governance, they can work with you to provide objective insights into your organisation, its systems and controls and highlight where your accounting systems and financial procedures could be improved. This can protect your business from human error, fraud or simple – and costly! – wastefulness.
A statutory audit of the annual financial statements has a very specific objective, which is the formal opinion on your financial statements. There are increasingly strict rules around ensuring the auditors you appointment are independent. However, you can also work with external auditors to agree other exercises focusing on areas of concern, such as controls over expenses and payments, or payroll issues.
Get practical advice and ongoing help
Maximise the value of your audit by obtaining and following your auditor’s practical advice focused on the immediate and future needs of your business. Your auditor’s objective recommendations could play a key part in improving your profits or even revising your business model.
The most important ingredient: trust
Opening up your business to an experienced professional can be a vulnerable undertaking for you. An auditor needs to know exactly what’s going on with your finances and must gain a thorough understanding of your affairs. What they find might lead to a few difficult conversations, so it’s important to have a strong, trusting relationship with them.
An external auditor’s investigation and subsequent advice needs to be completely honest and open. This is why their independence is absolutely vital. As we know from experience at Scrutton Bland, it can be hard to push clients on some uncomfortable truths when they’re paying your bills, but we also know that it would be disastrous and unprofessional to do otherwise.
Why use Scrutton Bland for independent audits?
Our highly qualified team of audit specialists has a huge amount of experience in assessing the financial landscape of a business and establishing ways to optimise their procedures.
- There will be no ‘grey areas’ in the audit – we provide clarity and focus tailored to your needs
- You’ll get the benefit of all our partners’ experience – we take a joined-up approach and can call on our colleagues in other parts of our business such as insurance or tax.
- The scope of our expertise includes publicly-funded organisations , privately-owned businesses and charities
- We’ve been a trusted partner to organisations like yours since 1919
Scrutton Bland has always been independent, and we pride ourselves on this position, in order to provide the best service possible to all our clients. Our standards of conduct are overseen by our regulatory audit body, The Institute of Chartered Accountants in England and Wales (ICAEW), who have considerable authority to discipline members whose ethical standards fall short. The ICAEW also requires members to keep their training and development up to date, and our internal procedures are designed to ensure we meet the highest professional standards.
Want to talk about your audit?
At the very least, an external audit brings peace of mind that a qualified specialist has taken an objective view of your business. At the most, as we have seen, an independent audit can save an organisation from mounting discrepancies, huge financial costs and in extreme cases, even injustice in the courts.
Whether you’re a large organisation with multiple sites or a growing family business with a single office, we can talk you through the way that an independent audit process can be tailored to your needs and show you how it can pay dividends in terms of confidence, improvements and future planning.