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By Phil Cowperthwaite
Accountants who perform audits gain a wealth of information about their clients – information that they can use to the benefit of businesses and themselves.
Accountants who perform audits gain a wealth of information about their clients, their clients' industries and business in general. In fact, the professional requirements in the Canadian Auditing Standards (CAS) require auditors to become aware of much more than just the contents of the statements they audit. Accountants can use this information to their advantage in a number of ways to both the benefit of businesses and themselves.
This is especially true for those practitioners fortunate to have a practice of small- and medium-sized clients. Smaller entities can most often take advantage of the reporting and general business expertise that every experienced, professional auditor has. By using this knowledge to benefit clients, practitioners can:
So how is this knowledge gathered in the audit process? There are a number of the requirements that result in information accumulation:
In short, the auditor develops a wealth of knowledge about every client. Smaller clients often look to auditors for advice in financial and other matters. So how do you best harness that information and focus it for the benefit of your client and your firm?
There are three areas where your audit knowledge could help clients increase the effectiveness of both corporate governance and management.
1. Improving quality of communications: communication between management, employees, the governing body and those external to the reporting entity is essential for success. Auditing on-site usually allows the auditor to take the pulse of the organization in areas beyond financial reporting, especially if the client is a micro-entity. Indications that communication may need improvement include:
Communication problems can simmer for an extended period of time until a crisis brings them to a boil. Identification of an issue by an impartial observer often triggers a response that can avoid a crisis before it occurs. If you come across communication concerns during the audit, then you likely have a significant matter that needs to be communicated to the governing body and management, as appropriate (CAS 260.19 and CAS 265.10). Your recommendations can be the beginning of resolution of a problem that management and those charged with governance can talk about and resolve.
To address communication issues, try talking with the parties involved instead of just writing a letter. Focus on the important issues and help your clients understand the benefits of better communication.
2. Improving the quality of financial management: small and micro-reporting entity management often does not have formal management training. There can be confusion as to how and when to do budgets, what record keeping is required and how best to evaluate results. Financial management is a core competency of our profession; accountants can add value, especially at the micro-entity end of the spectrum where the entities cannot often afford full-time expertise.
The auditor typically comes face-to-face with budgeting in every audit when, for example, developing an understanding of the entity, identifying risks of material misstatement and evaluating management's assessment of the going concern assumption.
This familiarity can be used to provide advice in the following areas:
These are not so much control issues as mechanics of preparation of financial information and its communication.
Auditors can assist management to develop a financial management checklist covering responsibilities for recordkeeping tasks from the weekly (payroll, petty cash) to the annual (T4 and other compliance functions). The checklist can also cover budgeting and results evaluation; it need not be complex.
Providing recommendations is the easy part. Going the extra step to help develop a system for implementation and followup is critical. As always, assurance practitioners must ensure that taking an extra step does not impair their independence.
3. Improving the stewardship of entity resources: how to control resources to make sure they are used only for approved purposes is often a black box for small clients lacking management expertise. On top of that, many accountants incorrectly assume that micro-entities cannot implement appropriate controls as there are too few people involved. For example, in many very small entities, some control functions are carried out very effectively by board members. This is an excellent opportunity for practitioners to leverage their understanding of the design and implementation of controls in areas of financial reporting (such as fraud and related parties, to name just two) and their specialized knowledge of micro-entity operations.
Try starting by explaining to clients that controls need not be implemented for their own sake; they are only a means to ensure resources are used as intended. First, help the client determine the objective of the control (e.g. that all salary levels are appropriately authorized). Then, recommend controls proportionate to the entity. Remember: every SMP is an SME, so controls appropriate for your firm can also well work for your client.
Auditors must always remain independent. Providing advice to audit clients may result in threats to the auditor's independence, especially when recommendations relate to financial reporting. This does not mean, however, that the auditor cannot recommend improvements to controls and other aspects of a client's business. In fact, reporting significant matters is a requirement in any audit.
Safeguards, however, must be put in place to ensure that making recommendations does not cross the line of impairing independence and this requires professional judgment.
You develop a wealth of knowledge about your clients and their industry with every audit. You can leverage that knowledge and use your experience to add even more value, especially to small and micro-entities in the areas of communication, financial management and stewardship of resources. Doing so can result in an increased industry reputation, reduced client turnover and increased fees. Try it. You just might be surprised with the results.
Phil Cowperthwaite, FCPA, FCA, is a partner of Cowperthwaite Mehta and a member of IFAC's Small and Medium Practices Committee.
Technical editor: Glenn Rioux, MM, CPA, CA, vice-president, standards, CPA Canada
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