What is a Financial Audit and why are they Important?

A financial audit is a comprehensive review of a company’s finances, including all the statements prepared by the company’s accountant. It identifies discrepancies in the records and provided statements, presenting any such issues, along with accurate data, in a report. Its purpose is to determine if a company is showing a true and fair picture of its financial situation and if it meets accounting standards. 

Given that a financial audit is a close and thorough look into a business’ inner workings, it is understandable how owners and workers can find the experience stressful. However, audits must be performed for a number of important reasons.

Legal and Regulatory Compliance

Organisations that deal with money such as banks and insurance companies are required by law to get an audit. Corporations and public companies also need to have their accounts audited. 

Most small businesses are not legally obligated to get an audit. However, depending on what industry they are in, they can be subject to regulatory compliance. Certain business sectors require companies to meet privacy standards and hold on to records for a specific length of time. Audits ensure such standards are being met and that relevant documents are still accessible.

Reliable Financial Reports

Whatever the findings may be after getting audited, the one sure result is that it sets up a system wherein a company can consistently produce accurate financial reports in the future. 

Knowing such data is reliable—a company will be able to determine which of its products and services are turning up a profit and which ones are sustaining losses. It can then manage and distribute its resources accordingly for more efficient operations. 

Improved Systems and Controls 

An audit will test the strengths and expose the weaknesses of a company’s systems and controls. From performance monitoring and measuring to record documentation, all these processes put in place will be thoroughly examined in an audit. Deficiencies in such structures are identified, and specific changes can then be suggested. 

Applying these recommendations should very well lead to marked improvements in optimising for productivity as well as preventing and fixing internal errors.

Fraud Prevention and Detection

Fraud continues to be a major concern, as 50% of UK businesses have experienced fraud in the past two years, according to PwC’s Global Economic Crime Survey 2018

An audit can detect irregularities in transactions that, upon further investigation, could lead to fraud happening either externally or internally. Improvements in a company’s systems and controls brought upon by an audit remove gaps that could be exploited for fraudulent activity. 

Even just the regular conducting of audits that have been proven to be airtight can deter would-be fraudsters from misappropriating a company’s funds.

Risk Mitigation

Running a business requires capital. Capital, however, does not come cheap. The higher the risk involved in running a business, the greater the cost of capital. 

Risk manifests itself in different ways, such as possible mistakes in processing transactions, incomplete information leading to substandard operations, and the potential for fraud. Audits reduce all these risks, and in turn, reduces the cost of capital.

Shareholder Confidence

With business confidence in the UK at its lowest since the financial crisis in 2012 due to Brexit, it is crucial now more than ever that companies reassure their shareholders of the direction they are taking and the successes they are experiencing. 

Audits provide the transparency investors demand from businesses. When they are given objective assurances that their investments are utilised properly and have good returns, they continue their support. 

Creditors will also be more likely to approve loan applications when a company provides a financial report from an external auditor. A positive financial report is evidence of a business’ capacity to pay their debts.

Marketplace Credibility

Sources of income need not be confined to parties that already have a financial stake in a company. Venture capitalists, angel investors, and even other businesses looking to expand can be enticed to put their money into a company with good potential for growth. 

Securing such investments can be made easier when a company’s finances have been externally audited. Audit reports act as proof that a company is credible and worthy of monetary backing, whether it is through equity shares or a complete purchase of the company should the owner decide to sell it.

Employee Empowerment

When an audit reveals the flaws in a company’s processes, the steps taken to address these flaws necessitate clear communication between management and those directly responsible for related tasks. This is a prime opportunity for employers to further engage their employees with the work they do and let the workers share their ideas for improving the processes. 

Over 90% of employees believe workplace recognition is important. By including employees in the discussion and development of operational procedures, they are empowered to be more proactive and contribute to the company’s improvement. 

Employees being made aware that their performance is tracked and tied into the overall performance of the company also instils a greater sense of accountability. Knowing that mistakes are being made and highlighted in an audit urges workers to self-correct even with the seemingly insignificant details of their jobs. 

Bringing Stability, Building Trust

Employing financial audit services shows the reality of a company’s financial situation through cold, hard facts. These facts provide a reliable baseline that a business can use to pinpoint problems, pivot properly, create concrete solutions and communicate trustworthiness to stakeholders. If you need help auditing your organisation, feel free to get in touch with one of our professional accountants