Auditing & Accounting

Accounts are records of information, specifically information on a company’s business transactions.

Accounts are compiled, monitored and analysed by accountants. Accountancy is a skilled profession. You cannot be one without being accredited, which requires passing a series of exams set by a professional body.

A big problem with accounting is that the process is so opaque and complicated that very few people understand it. Fewer eyes on the books makes it easier for mistakes or frauds to slip under the radar.

An audit is an inspection of a company’s accounts to make sure they give a ‘true and fair view’ of what state the company’s finances are in.

Most commonly external audits of companies are provided by private accounting firms. Globally, the industry is dominated by a handful of firms known as ‘the Big Four’. They are: PricewaterhouseCoopers (PwC), Ernst & Young (EY), Deloitte, and KPMG.

An audit involves the auditor looking through a company’s accounts, deciding if they contain any material misstatements (i.e. frauds and errors that are significant enough to have a large impact on the company’s finances) and then publishing a report on their findings.

You’d think a public interest entity is any company that the British public has a substantial interest in. But officially, a PIE is “an issuer whose transferable securities are admitted to trading on a UK regulated market”.

Double-checking company books makes it more likely that anything that is incorrect (deliberately or mistakenly) will be spotted. Additionally, it adds transparency to the workings of a business. That helps build trust in companies and their operations.

Audit failure is when an audit does not achieve what it is supposed to achieve; providing useful, impartial information about a company’s finances to its stakeholders, and detecting any fraud, accounting mistakes and other questionable financial practices that might lead to the company having business troubles.

Bad business practices can lead to layoffs, lower tax revenues, poorer pensions and destabilised economies. And because a lot of stakeholders don’t realise exactly how many issues audits can have, they can end up putting more trust in the process of auditing than they should and end up getting burned.

Much of the conversation around what good auditing should look like can be reduced down to the idea that audits must be informative and useful to all the company’s stakeholders.

Ultimately, all the things that come with good auditing allow trust and understanding to be built up between people and companies. That brings a society together. So good auditing could be a tool we use to make our economies work better for everyone.

There were people who double-checked public spending in Ancient Egypt and the Roman Empire. But auditing as we think of it today is closely linked to the growth of modern industry, which began during the Industrial Revolution.

From balance sheets to profit and loss accounts; from cash flow statements to notes to the accounts.