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Is procurement ready to manage under-fire auditors?
In mid-June 2018, the UK’s Financial Reporting Council (FRC) reported a decline in this year’s audit inspection results from the big four audit practices.
It’s hard to think of anywhere else suppliers of a service which is so critical to the business can consistently underperform. Procurement can help address the problem, but first, let’s look at why auditors are so important.
The role of an audit
An audit is a systematic and independent examination of books, accounts, statutory records and documents of an organisation to ascertain how far the financial statements, as well as non-financial disclosures, present a true and fair view of the business and ensures that the accounts are properly maintained.
But this is not just a box-ticking exercise. An internal audit also serves an important role in preventing fraud. Audits protect the interests of shareholders by ensuring assurance against financial misstatement activities that will result in making the business appear more profitable, driving up share price and bonus payments as well as impacting the banking covenants.
Audits determine the cost of capital, which can either support company growth or be the final nail in the coffin for a struggling firm, depending on which way you look at it. The cost of capital is largely comprised of the risk associated with an investment. The greater the risk, the higher the cost. Strong audit systems can reduce various forms of risk in an enterprise, including the risk of material misstatement in financial reporting. They also mitigate the risk of fraud and misappropriation of assets, as well the risk of suboptimal management. Better auditing can lead to lower cost of capital.
Stephen Haddrill, CEO, FRC, said,
“At a time when public trust in business and in audit is in the spotlight, the Big 4 must improve the quality of their audits and do so quickly. They must address urgently several factors that are vital to audit, including the level of challenge and scepticism by auditors, in particular in their bank audits. We also expect improvements in group audits and in the audit of pension balances. Firms must strenuously renew their efforts to improve audit quality to meet the legitimate expectation of investors and other stakeholders.” (Frc.org.uk, 2018)
Where procurement can help
Since audits are so vital to company well-being, it seems absurd that the big four suppliers in this area are so chronically underperforming. What other service would procurement allow supplier quality to slip to such a degree? If it were a manufacturing supplier with the 50% accuracy rate there would be a strong onus on procurement to put controls and KPIs in place to ensure the suppliers performance is improved.
One of the reasons procurement has shied away from addressing the supply of audit services is, largely, the board tend to select auditors, perhaps based on a pre-existing relationship. We have to be realistic about how much procurement can influence that decision. But that does not mean there is nothing procurement can do to improve performance and reduce risk.
There is a
supplier management opportunity here for procurement to develop meaningful performance indicators and 360-degree reviews for audit suppliers to work with them to help achieve higher standards. After all, it looks like they could do with a showcase to counter negative publicity in the sector. In an area where we often do not see good supplier relationship management, any effort at improved SRM is likely to improve performance. The FRC report could be turned into an opportunity to bolster procurement’s reputation.
To
benchmark your SRM activities against leaders and industry peers, take part in the 2018 research by 13 July 2018.