Role of auditors in small business performance

Small and medium enterprises (SMEs) often rely on accountants from their audit firms to assist in reconciling accounts, preparing the adjusting journal entries and preparing financial statements, they often lack the sophistication necessary to carry out these tasks.

Relying on the audit firm often made sense from the perspective of efficiency and cost containment. Auditors are the first to know the performance of a company, in the light of recent fraud issue in quoted companies pertaining to the role of auditors have been raised by different quarters. Is it possible that the auditors of companies could have been unaware of what was happening in the company?

An auditor is required to express an opinion as to whether the annual accounts give a true and fair view of the company’s state of affairs and financial position.

To formulate such an opinion, the auditor needs to examine the company’s internal accounting system, inspect its assets, test-check of accounting transactions.

At all times, the auditor has to act with the care and skill of a professional of reasonable competence. Auditing encompasses a host of activities which primarily include investigation process, attestation process and reporting process

An auditor is required to employ reasonable skill and care as with any other person having specialised knowledge. The duty of safeguarding the assets of the company is primarily that of the management and one is entitled to rely upon the internal controls instituted by the management.

One takes into account any deficiencies noted therein. An auditor does not conduct the audit with the objective of discovering all frauds because, in the first place, it would not be possible to complete the exercise within the time limit prescribed by the law for the presentation of accounts to the shareholders.

Further, the cost of doing this would be prohibitive and disproportionate to the benefits, which may be derived by the shareholders. The external, independent auditor is engaged to render an opinion on whether a company’s financial statements are presented fairly, in all material respects, in accordance with the financial reporting framework.

The audit provides users such as lenders and investors an enhanced degree of confidence in the financial statements.

To form the opinion, an auditor gathers appropriate and sufficient evidence and observes tests, compares and confirms until gaining reasonable assurance.

An auditor then forms an opinion of whether the financial statements are free of material misstatement, whether due to fraud or error.

An auditor is not concerned with the policy of the company. It is no part of the auditor’s duty to give advice, either to directors or shareholders, about the operational aspect of the business. It is not an auditor’s prerogative to see whether the business of a company is being conducted prudently or imprudently, profitably or unprofitably.

His/her business is to ascertain and state the true financial position of the company at the time of an audit. An auditor has a fiduciary relationship with the shareholders of a company. Therefore, one has a moral obligation to see that ensuring that the statements issued are made with the utmost skill safeguards their interests and care and depict the true and fair state of affairs of the company.

The shareholders’ interests are dependent on the degree of care and skill applied by the auditor to draw up an accurate and honest report of a company’s state of affairs.

One of the primary roles of external auditors in corporate governance is protecting the interests of shareholders.

Therefore, the auditors should employ utmost good faith, care and vigilance in the carrying out of their duties. If there is the slightest bit of suspicion of the legality and integrity of a record or transaction, the auditor is under a duty to investigate and report it, before he certifies it to be true.

They may introduce measures and policies designed to compel accountability in the workplace. For instance, auditors could recommend penalties for officers who manipulate financial statements by inflating figures or “cooking” accounting numbers.

Penalties for such acts could include stripping the manager of his/her position or compensation, such as reducing annual bonuses, and even pensions.

This has affected most of the Nairobi Securities Exchange-listed companies such as East African Portland Cement, Uchumi Supermarkets, Kenya Airways, Express Kenya, Olympia Capital and Mumias Sugar, among others.

External auditors help promote corporate governance by conducting period risk assessment. Auditors review the security measures that a company has in place against corporate fraud or corruption.

In addition to assessing potential risks, auditors also analyse the overall risk tolerance of the company as well as the efforts the company has made toward mitigating risks. For instance, if a company or government agency has an under-performing whistleblower system, efforts may be made to improve this.

The efforts of an external auditor help foster a good relationship with regulators. Most regulators are supportive of firms and agencies that appear to have transparent operations.

The author is a managing partner at Watermark Consultants 

The views expressed in this article are of the author.

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