Many words in any language can become so heavily associated with one thing, that it becomes almost impossible to separate them. People don’t think of Timbuktu as a city in Mali, or a matrix as a cultural environment. Similarly, when people hear the word “audit”, their minds pretty much always rush to something along the lines of “Oh no”.
But, as unappealing as they may be, there is a lot to be said for conducting an audit. Although the word has certainly been tainted with negative connotations, audits can do a lot of good for your business, and could be the difference between success and failure. Here, we look at 11 reasons you shouldn’t avoid an audit.
Advantages of Internal Audits
The findings of internal audits, which are always conducted on a voluntary basis, are usually reserved for the likes of company board members and senior management. The primary purpose of an internal audit is to evaluate the efficiency of business operations, and allow business leaders to make well-informed decisions.
One of the main advantages of an internal audit is the effect it has on productivity levels. It achieves this first and foremost by evaluating how risks are assessed, the management structure, and the efficacy of the actual work process itself. Furthermore, simply knowing that their work will be reviewed with a fine tooth-comb will result in greater levels of productivity from employees.
While the main purpose of an audit may be to find inefficiencies or reduce costs, the fact is that some of the money disappearing in a business may be disappearing on purpose. No matter how many staff you have, how well you know them, or how much you think you can trust them, there will always be a risk of people siphoning money from the business. Some of these methods can be as simple as staff simply putting cash in their pockets and walking out the door, while others can be much more sophisticated and harder to detect. Internal audits can help clear the obscurity in certain areas of cash flow, and identify when funds are being misused, misappropriated, or just flat out stolen.
Although checking to ensure a company is compliant with the law is officially the role of an external auditor, using an internal auditor to evaluate the legality of the company’s operations can mean beating the external auditors to the punch. Whether it is due to incompetence, criminal intent, or changing laws, it is perfectly possible that your business may be breaking laws without you knowing it.
By conducting an internal audit, you will be able to identify and rectify any legal gray areas you find yourself in, before being forced to do so. This means you can avoid big fines and exposure to lawsuits, and also illustrates that you are a business interested in following the law, not circumventing it.
Increased Stakeholder Confidence
As the primary purpose of an audit is to ensure that everything is running smoothly, and suggest improvements that could be made, carrying one out voluntarily is a sign of good management. While stakeholders may not see the results of the audit itself, knowing that audits are taking place will give them more confidence in the abilities of the board.
Advantages of External Audits
Professional Services Withholding Tax
Unlike internal audits, external audits are often reported to people outside of company management, such as shareholders. There are many reasons that external audits take place, but one of their biggest advantages is lending credibility to the company, particularly by using a well-respected auditing company.
One of the biggest disadvantages of an internal audit, particularly for smaller businesses, is that bias can seep through. Risk assessment is one of the most important aspects of an audit, but people who have a vested interest in the company may, on a subconscious level, downplay the true level of risk in certain areas. The unbiased nature of an external auditor makes this less likely, and paints a truer picture of the health of the business.
Whether you’re conducting an internal or external audit, by the end of it, you want to have a list of improvements that can increase quality and productivity while also reducing costs and waste. Generally speaking, the advice you will get from an external auditor will be of higher quality than that received from an internal auditor, as they will have the experience of seeing different businesses face similar challenges, and will have a better understanding of which approaches do and do not work.
Unlike internal auditors, who will almost definitely have other tasks to carry out, external auditors are focused solely on the audit at hand. As well as being completed faster, the work they produce will be less likely to omit anything important, or rush through certain areas, as their focus will not be divided by other deadlines or responsibilities. The reverse is also true, with employees free to execute their normal duties without the distraction of also conducting an audit.
As mentioned earlier, one of the biggest advantages of an external audit is that they lend credibility to your financial statements. With self-reporting, there are lots of ways for a business to get creative with its figures and make itself appear much healthier than it is in reality. While this may not be a tactic you employ, the potential that you could will plant the seeds of doubt in the minds of potential stakeholders. An external audit is a quality seal that will give any potential clients, investors, or business partners the assurances they need.
Following on from that point, the documentation provided by external auditors will always carry more weight than those provided by internal auditors. This can make a huge difference when calculating your credit score or applying for loans, which are fundamental elements of growing your business and helping it to succeed.
Regardless of whether you’re running a small business or a major corporation, you probably having money moving in and out from all different directions. Things may seem clear cut at first, but as the business grows and more money is invested, loaned, and drawn out, things can quickly get murky. The unbiased nature of an external auditor is a very effective and definitive way to settle any legal issues that may arise, and the more often such audits are conducted, the less trouble you will encounter.
The word audit has been saddled with negative connotations for so many years that it is unlikely to ever be widely regarded as a good thing. But the reason we have audits is to ensure that business are being run well, fairly, and legally. Despite the images the word may conjure up in your mind, you need to recognise the value and utility an audit can bring to any business. If you can manage that, an audit could be the key to your success. But fail to do so, and you are setting yourself up for a lot of issues down the line.