Those charged with governance can receive a number of assurances from an independent audit in addition to the primary objective of assurance about the reasonableness of the organization’s annual financial statements. As an Audit Committee Chair and member of several organizations, I have found that these other assurances assist immeasurably in fulfilling my governance responsibilities.
Industry Best Practices
By selecting an audit firm with industry specific expertise, the board of directors and the audit committee have access to knowledge beyond financial statement reporting. As with any professional endeavor, substantial industry expertise results in better practice outcomes. An audit firm well versed in the industry in which the organization operates can share best practices and industry benchmarks that will assist those charged with governance as they lead the organization.
Risk Management
The board of directors has a substantial role in the monitoring component of enterprise risk management. An audit provides assurance that this responsibility has been fulfilled through this separate independent evaluation of the organization. The COSO framework on enterprise risk management recognizes this monitoring obligation of those charged with governance.
Disclosures by Management
The board and audit committee should review the letter of representations by management obtained in the ordinary course of the audit. These representations provide assurance that contingent liabilities and other risks have been fully disclosed both to the auditors and to those charged with governance. In addition, senior management demonstrates through these representations that they are both cognizant and responsible for these disclosures.
Financial Competence of CEO and CFO
Through executive session discussions, the board and the audit committee can assess with the independent auditors the financial competence of the CEO and CFO. If the organization is growing rapidly, they may discover potential deficiencies in technical competence before they adversely impact the business. Without effective leadership at this C-suite level, the organization cannot achieve its objectives. The auditors can provide an unbiased view into their competence level that cannot be obtained in any other manner.
Adequacy of Financial Resource Staff
These executive session discussions should also focus on the adequacy of the staff charged with the management and reporting of financial transactions. The independent auditors can provide a reality check on the staffing requirements needed as well as the current state of the skill set of the finance team. Sometimes internal management is not prepared to provide additional resources if budgeting is tight in the organization. This independent assessment of the financial staffing resource level is invaluable.
Confidence for Users of the Audited Financial Statements
It is important to select an independent audit firm that has acknowledged industry expertise by the external users of the audited financial statements. Those charged with governance will thereby be more confident that the audit report will achieve its intended purpose for shareholders, banks and regulators.
How do these points resonate with you? Do you see other ways in which the external / independent audit can provide value to an organization and its stakeholders? Let us know!