HOW TO MANAGE DATA RISKS WHEN ROTATING AUDITORS

It’s no secret that many corporations in the UK and Europe face big accounting fault risks. Some of these risks should eventually be addressed by forcing listed companies and public interest entities to put their audit out for tender every 10 years. That is a result of the EU Audit Directive that came into effect in 2015, specifying mandatory firm rotation (MFR) for auditing accounts.

Yet three years since the new rules were introduced, audit firms continue to hit headlines. Infrastructure firm Carillion announced an £845 million write down in the value of its contracts shortly after its accounts were signed off; high-street retailer BHS was sold for £1 just days after accounts were approved, and the rescue of Patisserie Valerie continues after the discovery of a £20 million black hole in its accounts.

Business risks

These examples reveal that the sector faces a significant challenge and audit rotation alone won’t eliminate the risks that businesses face from accounting irregularities. Yet one thing the recent examples have in common is a lack of understanding on the part of the auditors.

A critical way to protect a business against the catastrophic impact of accounting irregularities is to ensure auditors have access to the information they need, and strive towards creating a more transparent reporting process. But at a time when the volume, velocity, and variety of corporate data is expanding so fast, the challenge of creating transparency remains elusive for many businesses.

Internally as well, achieving transparency among 50+ business departments with different cloud storage systems and data rooms is a challenge, especially when there are system compatibility or inter-departmental communications issues.

Complex challenge

When data is scattered, the task of any auditor becomes more complicated than it needs to be. It also becomes easier for rogue insiders to hide, distort or lose key accountancy materials.

Indeed, evidence since the introduction of MFR suggests that businesses that report results in the immediate aftermath of an audit rotation suffer an initial loss in audit quality, partly due to the loss of a departing auditor’s cumulative knowledge about the business, but also due to the loss of data. It’s no surprise, then, that in 2018 we are still seeing an overall decline in audit quality.

Too many companies have yet to fully appreciate that this is not just an issue for the auditor to try to solve. It’s the survival of the business that’s at stake.

Pro-active approach

An important step towards a rational solution to these multiple challenges is to understand that pro-actively managing all earnings-related information is now, more than ever, a mission-critical responsibility of senior management. Any outside auditor whose role is to protect your business can only ever be as effective as the quality of the information they receive from the business itself.

Developing an effective approach begins with recognising the importance of a centralised repository of information. A secure file-sharing technology is essential, and using a serviced data room that makes it easy to perform tasks such as asking questions and adding comments to documents will accelerate the process significantly. Because data rooms allow a business to get its data in one place, they can drastically reduce the incidence of errors, data losses, and opportunities for rogue parties to delete or hide information.

To help our large corporate clients prepare to tender their audits, we have updated our platform specifically to make data collection and communication between teams as easy as possible during the auditor rotation process.

If you would like to know more, get in touch.