The term ‘audit’ often carries a sense of apprehension. Many view it as a mandatory requirement rather than an opportunity for growth and improvement.
However, audits play a pivotal role in fostering good business practices, providing invaluable insights into a company’s financial health, operations and governance.
Let’s delve into the vital role of audits in today’s corporate environment.
What is an audit?
An audit is an independent examination of an organisation’s financial processes and records.
Audits are conducted by a third party, usually a registered auditor. These specialist accountants will closely examine your financial statements and internal controls to make sure they comply with laws and financial regulations.
Regulatory requirements and legal obligations
The Companies Act 2006 mandates audits for companies of a certain size. Under this act, companies may be exempt from audits if they meet two of the following three conditions:
- they have an annual turnover of less than £10.2 million
- their gross assets are worth no more than £5.1 million
- they have 50 or fewer employees on average.
Additionally, various industries have their own specific auditing requirements. For example, companies involved in financial services are also subject to oversight by the Financial Conduct Authority (FCA).
The benefits of audits
While audits are mandatory for some businesses, they’re also a marker of excellent business practices and transparency.
As a result, there are many instances where a business opts for a voluntary audit. For example, if the company is seeking investors, planning a major transaction such as a merger or acquisition, or simply aiming to improve their internal financial issues.
Let’s take a close look at the role of audits in business:
Audits provide invaluable data for benchmarking business performance against industry standards.
Understanding how your business stacks up against its competitors is essential, whether you’re running a startup or a multinational corporation.
An audit can help managers measure their company’s performance using key performance indicators (KPIs), providing decision-makers with insights essential for sustainable growth and development.
Whether it’s market entry, major investments, or organisational restructuring, a comprehensive audit can promote smarter and safer business decisions.
An audited financial statement is often a prerequisite for securing business loans or external investment.
As a general rule, financial institutions view audited statements as a more reliable source of information, which can speed up loan approval processes — and could even lead to more favourable loan terms.
Audits can also play a key role in identifying fraudulent activities within the company.
Whether it’s irregularities in your accounting practices or discrepancies in financial statements, an audit can serve as an early warning system. Flagging these issues early on can enable you to take corrective action before they escalate into significant problems.
Corporate social responsibility and sustainability
An increasingly important aspect of modern business is corporate social responsibility (CSR) and environmental, social and governance (ESG).
Some companies opt for social and environmental audits in addition to regular financial audits.
These reviews can be crucial in improving and maintaining a company’s reputation, as well as demonstrating its commitment to ethical and sustainable business practices.
A thorough examination of your accounts can uncover hidden tax savings. While tax planning is a different service to an audit, professional auditors can use what they learn from your accounts to help you improve your tax strategy, ensuring your company only pays its fair share.
Global business and cross-border operations
For businesses trading across borders, international audits can ensure that your financial operations comply with the laws and regulations in other juridictions.
These audits are critical in global business settings, where inconsistencies in accounting practices can result in severe financial and reputational damage.
Improved risk management
Companies can identify financial, operational, or compliance risks through auditing. Acknowledging these weak points can give you the opportunity to take action and tackle issues ahead of time, ensuring you always stay compliant and keep your finances in check.
Enhanced operational efficiencies
Going beyond financial statements, an audit can also consider your company’s operational practices.
Auditors can identify inefficiencies in your processes and suggest improvements, helping you streamline operations, reduce costs and ultimately boost profitability.
In a business landscape demanding transparency, audits assure stakeholders about a company’s fiscal and operational stability.
Audited financial statements can increase stakeholder confidence by demonstrating its integrity and long-term viability.
Audits are sometimes obligatory to meet compliance standards, but they offer much more beyond that. They provide a detailed look into a company’s financial health, identify risk areas, improve operational efficiencies and enforce compliance.
So, don’t write off the benefits of an audit just because you’re not obliged to conduct one.