(P) The importance of modern audits for the success of companies

by  Dr. Bernd Keller, Economist, Auditor, Tax consultant  Partner

The subject matter and the scope of an audit are prescribed by law. This means that the regulations on the audit of annual or consolidated financial statements and the (consolidated) management report included in the German commercial law determine the basic audit approach. But they do not contain any provisions on conducting the audit and, therefore, the auditor must in every case use his or her professional judgement in deciding about the type and scope of the audit. At the same time, the audit must confirm the reliability, and thus increase the credibility, of the information contained in the financial statements and the management report. Reliability implies correctness as stakeholders must rely on it when interpreting the facts and figures presented in the financial statements. In this respect, it is beyond dispute that the addressees of the audit reports take into account the audit findings when making their decisions.

At the same time, the discussions about the value or the benefit of audits cannot come to an end because of different regulatory and economic factors. The measures, initiated mainly by the European legislators and already implemented at national level, with the aim to increase the quality of the audit of financial statements, as well as the planned measures to regulate the structure of the market for audit services to some extent seriously interfere with the discretionary freedom of the legal representatives and supervisory bodies of audited companies and of the auditors themselves. Nevertheless, an audit of financial statements – if properly conceived and conducted in a modern way – can contribute to the success of companies.

The starting point for the observation of how a modern audit of financial statements can contribute to the success of a company is to understand the different responsibilities of the parties involved. The management board or the managing director of a company is obliged to compile annual financial statements which give a true and fair view of the company’s net assets, financial position and results of operations taking into account the principles of proper accounting. In addition, a management report has to be prepared. The auditor examines whether the statutory provisions have been observed, whether the quantitative and qualitative components of the company reporting are free of material errors and, therefore, the annual financial statements and management report give a true and fair view of the company’s net assets, financial position and results of operations.

As auditors, we see the audit of financial statements as much more than just collecting and examining accounting documents. It is rather a comprehensive approach to the company that involves asking questions about the company’s net assets, financial position and results of operations, the market situation, the developments that are underway, and the specific risks that the company is facing. An audit of financial statements is a thoroughly complex and interdisciplinary service in a risk-fraught regulatory environment. This service must satisfy the stakeholders’ interests by properly informing them about the future development of the company and the business models it pursues.

In this respect, one of the goals of a modern and risk-oriented audit is to examine the business model of a company and its important business processes against the background of the procurement, labour and financial/capital markets. Besides the service processes, the audit also focuses on the company’s accounting/bookkeeping. In this context, it plays a substantial role in assessing the controlling processes, the internal control system and the early warning/risk management system.

Thus, a modern audit approach using appropriate tools and methods produces important findings that can be significant for responsible company management on the one hand and for the success of a company on the other. Such significant findings may include aspects which pose a threat to the company’s operations or provide a starting point for improving efficiency or introducing cost saving measures or offer the company outstanding business opportunities for the future. Therefore, to conduct a modern audit means to identify the aforementioned issues and communicate them in an adequate and meaningful manner. This we can do if we keep a close – and a well-trained – eye on every detail and use appropriate methods and tools.

Gone are the times when countless accounting documents were only reviewed and columns of figures were ticked off. The above cannot be countered by stating that, during the audit, the auditor deals with issues which he/she is not able to assess in a way that would be sufficient in terms of scope or quality. The argument that the added value is almost fully eaten up by additional costs is not true either as only the way the service is performed is changing.

In this respect, a modern, risk-oriented and business process-related audit by an auditor who can see in his mind’s eye development-related issues that lie ahead in the future, is an important building block for companies to notch up even greater success.

Rödl & Partner is active at 94 wholly-owned locations in 43 countries. The integrated firm for audit, legal, management and tax consulting owes its dynamic success to over three thousand entrepreneurial minded partners and colleagues. In close collaboration with our clients we develop information for well-founded economic, tax, legal and IT decisions that we implement together – both nationally and internationally.

Source: www.roedl.de/themen/