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. Under UK law, companies are required to be independently audited once every financial year unless they are small and private (i.e. not listed on a stock exchange). “Small” in this case means employing less than 50 people and making less than £10.2 million a year. According to the Federation of Small Businesses, 99 percent of UK companies are small.
While auditing might sound kind of boring (and reading auditing reports is indeed kind of dull), auditors play an important role in our economy - and one that affects ordinary people much more than many of us realise.
The idea behind audits is one most people support: that having an extra pair of trained, impartial eyes to look over company books will help catch both unintentional mistakes and intentional falsehoods before they cause substantial damage. And while companies - or at least honest ones - can benefit from this service, auditors are generally thought of as being primarily a way to protect the interests of a company’s stakeholders.
A stakeholder is anyone who is affected by the business’ success or failure. That includes the company’s employees, its suppliers, its customers, its shareholders (i.e. people who bought part ownership of the company on a stock exchange), its other investors, its industry regulators, and its tax authorities, which are usually the governments of the places it operates in. You yourself may be a shareholder without even realising it, because most of our pensions are invested in the stock market. Sometimes, a company is large and important enough that society in general can also be considered a stakeholder, because everyone would notice the effects of the company raking in record profits or going bust. These types of companies are known as public interest entities.
There is a bit of a problem with this idea behind audits, however. While it is a fair depiction of what most people expect or think auditors should be, it’s not generally considered a great description of what auditors actually are. That’s not necessarily because auditors aren’t doing their job properly, but because the way their job has been set up is designed to achieve certain things and benefit certain groups while ignoring other possibilities. Reformists have called this an “accountability gap” and say that if we shook up the way auditing is done we could change it into something that produces the sort of results we talked about above… the sort of results that would benefit many more people and do many more things that society would value.
Having said that, just because not all the shortcomings of auditing have been blamed on the auditors themselves doesn’t mean none of them have been. Indeed, there has been a string of auditing failures across the world which have followed a similar pattern: after a large company falls apart in a spectacular fashion, it is discovered that its auditors either missed, ignored, or in some cases covered up serious financial problems that should have been reported to stakeholders.
You probably recognise some of the names of the companies this has happened with in recent years, including Carillion, Patisserie Valerie, BHS and Thomas Cook. In all cases, thousands of stakeholders suffered big hits to their finances and wellbeing: jobs were lost, contractors went unpaid, shareholders lost loads of money, taxpayers paid the bill for government bailouts, and so on.
These audit failures, unsurprisingly, have strengthened the calls for audit reform. In 2021, the UK government published a set of proposals for changes it would like to see in the industry. After a public consultation period, some of these new rules will be implemented.