‘Governments rely too heavily on auditing’

I had the great pleasure of addressing a number of finance professionals at Shell’s headquarters in The Hague recently.

The event, which had the theme of “new challenges and opportunities for business”, featured a wide-ranging discussion. It concluded that, given the diverse demands on the profession, there has never been a more exciting time to work in finance.

I wholeheartedly agree with this conclusion – our profession is more about creating sustainable value than about simply cranking out the numbers.

It’s vital both to produce external reports that present a true and fair view of an organisation’s financial performance and to deliver accurate, timely and insightful internal management information, but these tasks should be seen in the ­context of the overarching requirement to help create a “well-managed organisation”.

There should be a high degree of alignment between the information reported to boards and that reported to shareholders and other stakeholders. External reports should contain the top slice of information that’s included regularly in board reports.

They should be presented in an engaging way and provide enough forward-looking information for users to take an informed view about the long-term value proposition implicit in the organisation’s strategy and business model.

The content should cover all material issues in an integrated way, reflecting the interactions between strategy and external factors, including relevant environmental considerations.

The finance function must also be adroit at providing appropriate information to allow effective internal decision-making.

As well as being relevant to the production of meaningful external reports, management accounting skills are essential here too. Understanding and analysing the issues involved, and providing insights on a range of alternative scenarios and their associated risks and opportunities, is the stock-in-trade of the management accountant – an essential member of the finance team in a well-managed organisation.

External auditors challenge companies to provide external reports that make all the necessary disclosures, but the growing complexity of the reporting requirements has led to the proliferation of reports that are hard to understand. This limits their value to users seeking to rate the effectiveness of the management teams concerned.

Governments and regulators have a role to play in creating the conditions that allow well-managed organisations to emerge, as well as in establishing frameworks that expose those with poor management structures, policies and practices.

But too often these frameworks seem to be based on the assumption that auditing is the panacea and that the professionally sceptical independent auditor will provide sufficient control

This is not the case because the role of audit is too narrow – auditing may “do what it says on the tin”, but this is insufficient. I believe that an extension is necessary to include some form of assurance on the processes that organisations use to produce information for internal decision-making.

It may not be possible to determine, without the benefit of hindsight, whether board decisions are optimal, but it should be possible to determine whether the information relied upon by decision-makers is relevant, complete and reliable.

The creation of sustainable value requires well-managed organisations. Well-managed organisations need top-class management information and, consequently, access to excellent management accounting skills.

I believe that regulators rely too much on auditors to avert business ­failures – they should place more emphasis on the supply of information for effective decision-making. This would help to promote ­better-managed organisations, which would in turn create greater long-term value for the benefit of society.

23/06/2011

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