Can investors trust management? A business case for doing an audit

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Date: 17 June 2020

A female auditor completes a stocktaking inventory in warehouse

Conducting a regular business audit is vital to monitor and inspect the financial position of a company. Audits help bring clarity to managers, demonstrating where their cash in-flows and out-flows are going to and from. They also help prevent businesses losing track of assets and overheads.

Audits can take many different forms and depending on the nature of your business. One type of audit may be more relevant to your business than another. For example, in retail businesses and those where financial success is based on selling tangible products to customers, a retail audit measures the volume of products being sold. The success of a service-based business depends on the quality of service employees deliver customers, meaning a quality control audit would be more appropriate.

Other than clarifying a business' financial situation, a thorough audit can offer potential investors the reassurance they need before making an investment decision. The main benefits of supplying investors with an audit are:

  • Adding credibility to financial statements - the main purpose of an audit is to verify that the financial statements made by a business are correct and accurate. This helps build investor trust.
  • Improving planning, budgeting, and forecasting - since financial audits give an insight to the assets, liabilities and cash inflows and outflows, this information can be used to plan ahead and ultimately limit potential financial risks a business might face. From an investor’s perspective, this shows professionality and key organisational skills.
  • Compliance - demonstrating conformity with statutory requirements is the ultimate way to show investors that a company is in fact who they say they are.

As any investor or entrepreneur knows, transparency is a key determinant as to whether an investor goes through with their investment.

The importance of investors for emerging businesses

For businesses just entering a market, having easy access to capital is crucial for survival. Therefore, the monetary support offered by investors is can be invaluable.

While immature businesses have not yet built a high level of trust with external shareholders, going beyond the minimum lengths necessary can help. There are numerous ways an audit can help build trust. Since new businesses are still in the development phase, providing interested investors with an operational audit is advised. This helps outline the business’ goals, targets, procedures, and current outcomes. By providing investors with this information ultimately shows transparency, painting businesses in a positive light from the get-go.

The effect of technology on business audits

As technology continues to impact on all industries, the dynamic nature of markets intensifies. Technology is the catalyst behind most business innovations. Keeping up with developments and monitoring the performance of your products and service is critical if you want to avoid being labelled ‘outdated’. Investors want to see businesses developing strategies and creating innovative ways of working to keep up with competitors. An operational audit demonstrates your business’ willingness to set goals and targets to deal with market changes and forthcoming advancements.

Regardless of the type of audit you undertake audits, including statutory audits, are put in place to examine the accuracy and legitimacy of the financial statements you present. They provide potential investors with the verified information they need before taking the leap towards investment.

Copyright 2020. Featured post made possible by Andrew Millet BA MBA FCA, Wisteria

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