Finance departments are typically swamped with recurring deadlines, compliance measures, and growing concerns about staying productive in an ever-changing sector.
Every day is a battle to control money, people, and workflows, but what’s especially pressing is the fact mandatory assessments, namely, annual audits, are permanently ingrained into the slew of duties these business-critical teams deal with on a daily basis, often diminishing time and resource.
Here, we have explored the significance of audits, in terms of what they entail, along with the wider implications should they become problematic.
People have likely invested in your business, typically stakeholders, who need honest statements to ensure future decisions they make are done so in accordance with accurate information.
Your integrity is also paramount to customers, so auditors check for falsified statements or general inaccuracies which may indicate unlawful activities, the likes of which could tarnish your brand’s reputation.
Following the law will ensure compliance with important regulations, some of which apply to everyone, and others may only impact certain job roles, such as the National Minimum Wage Act 1998, providing finance in particular with a clear framework around the legal payments expected for different age brackets.
Underpaying staff is a serious breach of compliance, and if auditors discover staff earning less than expected, your business could be fined up to £20,000 per employee affected.
But it’s important to remember, a substandard audit doesn’t necessarily mean businesses have engaged in prohibited activities – this could simply indicate that certain changes are needed to improve financial management and performance moving forward.
Although this can be a relief, knowledge that revisions are now obligatory can be problematic for key decision makers, who may need to rethink their current processes, along with the sort of personnel and technology now required to uphold forthcoming amendments.
Control in this sense may lean itself into many forms of communication.
Think about the accounts payable process, in which invoices are received, verified, approved, and finally paid.
That’s several stages, and in most cases, played out by numerous people – without full control, visibility, and accountability established, its likely for unpaid invoices to rack up.
Failure to register your expenses may impact net income, and with it, suggest your business is more profitable than it really is.
Mistakes happen, but failing to acknowledge these and holding people accountable will increase the severity of any repercussions later down the line.
Even when people and technology are perfectly in sync, our minds can start lagging, and software could malfunction, creating a downward spiral that diminishes critical thinking, and reduces general proficiency.
External factors may also dictate the way finances are reported, so unless everyone sings off the same hymn sheet, certain team members could be unaware of economic parameters which have now shifted the way finances should be documented.
In the most serious cases, a challenging audit may be caused by allegations of illegal activities performed by the business.
Some of these include falsifying statements, misappropriation of customer funds, or embezzlement carried out by a member of staff.
The very latter also ties into the idea of control and visibility, as without this clearly established across your financial reporting, it becomes harder to track where and how your team members are handling money.
Team members will start questioning your businesses’ credibility, struggle to see how progression is possible, and may decide their futures are better served elsewhere.
On the flip side, management will need to make some tough decisions, and the most significant will of course be redundancies, which may be needed to realign wayward finances.
Your business value will reduce, causing stock prices to fall, which impacts the initial investments made by shareholders.
To compensate for impending difficulties, it may be necessary to reduce or even suspend dividend payments, further diminishing any income these individuals make.
It then becomes tougher to attract future investments from stakeholders, making it trickier to hire more staff, and purchase new technology, both of which may be necessary to remain competitive.
People buy from people, so if your personnel are caught up in financial scrutiny, this will impact your customer’s desire to make a purchase.
Customers may also express concerns around data protection, as their names and addresses could be intertwined with documents under the microscope.
And, if customers have signed up to your services as they’reconsidered critical to their own operation, experiencing interruptions will negatively impact the flow of money they accrue themselves.
Most internal scrutiny will be placed on the regulatory team, who will now face increased pressure on their workload.
Getting to the core of problems and making necessary changes are time-sensitive duties, and time simply isn’t a luxury afforded to most, if not all members of a finance department.
Fines and penalties may also be administered, not only to the company, but also to individual people involved.
Such fierce action still might not be enough for people to believe change is possible under the current regime, so calls for reform may follow.
Businesses are expected to file tax returns within prescribed time-frames, and these will often be made in accordance with specific jurisdictions, such as payroll tax, which is typically made monthly to coincide with the period in which staff are expected to be paid their wages.
Deadlines are crucial for tax returns, and these will always be mandatory, which means streamlined communication and accountability are paramount, otherwise payments will be missed.
Financial information is among the most sensitive.
Without very strict protocols to protect all data communicated between yourself and any customers or staff, you could open the potential for cyber-attacks.
Unless data has been consolidated into a unified, single source of truth, it becomes harder for financial departments to keep people’s details out of the wrong hands, as you’re not certain where files are being kept, and completely unaware of who is accessing these.
Should auditors discover GDPR breaches, your company may beissued with fines upwards to £8.7 million or 2%of your annual turnover (whichever is higher).
A lot more topical given the scrutiny placed on businesses being accused of using this to push their own political agenda.
During checks, auditors will be assessing how businesses are recording and reporting their ESG credentials.
This will explore environmental, social and governance risks, with focus on the sort of measures being publicised, and comparing this against strict guidelines.
The very moment laundering is suspected, it may be necessary to scour copious files, tasks, and communication made with multiple people.
You can imagine how difficult and time-consuming this can be when relevant information hasn’t been merged into amalgamated records with everything you need in one place.
In fact, tracing the origin of money could be impossible without coherent trails, clearly documenting when and by whom certain financial tasks were completed.
According to gov.co.uk, there are currently several parameters which dictate the sort of businesses that must undertake an audit.
Below are just some of these.
· Public company (unless its dormant)
· Authorized insurance company
· Involved with banking
· Issues electronic money
· Special register body
You might qualify for exemption so long as your company adheres to at least two of the following stipulations.
* These only apply to financial years that begin on or after 1st January 2016.
· Annual turnover is no higher than £10.2 million
· Assets are valued below £5.1 million
· Averages 50 or fewer employees
Typically speaking, no more than three months will be projected, which includes planning and key checks, with the remaining time used to create a formal report.
The speed and efficiency of audits will be largely dictated by your own control, visibility, and accountability, since this ensures key information is surfaced both quickly and accurately.
However, the scale of your organisation can often be the biggest stumbling block, such as the US Defence Department, who last year, failed their fifth audit on the spin.
Around 1,600 auditors analysed $3.5 trillion in assets, and later discovered that 61% of these couldn’t be accounted for.
Wholesale changes were announced last year by the UK Government, which indicated a pledge to revamp the current system through a brand-new regulator.
The primary aim is to establish stronger audit regime and corporate transparency, which should prevent sudden collapses, such as BHS during 2016, in which 11,000 jobs were put at risk.
ARGA (Audit, Reporting and Governance Authority) is the proposed regulator, which will also target the largest private companies like BHS for the very first time, given their impact on the wider economy.
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