Automating audits

Sarah-Jayne Martin at Quadient argues that automation is the trick up the sleeve for businesses navigating audit reforms

 

As we move into the second half of the financial year, businesses should place a strong emphasis on understanding and adapting to the Draft Audit Reform and Corporate Governance Bill, which the UK’s Labour government pledged to progress in July’s King’s Speech. This proposed legislation seeks to tackle persistent issues related to audit quality and corporate governance failures, signalling a significant shift in regulatory expectations.

In practical terms, companies that are subject to audits will experience heightened scrutiny. To meet these rising standards and avoid potential pitfalls, businesses should increasingly turn to automation as a strategic tool. By doing so, they can streamline compliance processes and maintain the high level of transparency that regulators will demand in this evolving landscape.

 

What do business need to know?

There was much speculation about whether audit reform would be included by the previous UK government in the 2023 King’s Speech. Although it was ultimately left out, the new Labour government took up the mantel and pledged to advance the bill, making it a key legislative item in their 2024 speech. 

 

These proposals seek to transform the UK accounting and auditing landscape by addressing deep-rooted concerns about audit quality and corporate failures, highlighted by high-profile cases like Carillion, BHS and Patisserie Valerie. Specifically, the bill aims to: 

• Establish the Audit, Reporting, and Governance Authority (ARGA) to replace the Financial Reporting Council, with greater investigative and sanctioning powers.
• Extend Public Interest Entity (PIE) status to large private companies, imposing stricter audit requirements.
• Introduce a new regime to oversee the audit market, prevent conflicts of interest, and enhance sector resilience.
• Reduce regulatory burdens on smaller PIEs by removing unnecessary rules. 

Ultimately, the legislative goal is to restore trust and confidence in the governance and transparency of UK companies, and reduce the harm that financial reporting errors can do to businesses and communities.

 

Why does this matter?

Many businesses may be uncertain about the practical implications of this legislation and how it will affect their daily financial operations. Although the full implementation of these reforms might take two to three years, one thing is clear: companies should anticipate a more rigorous and forensic approach from regulators as these changes take effect.

 

This new stricter approach, as referenced earlier, primarily stems from historic examples of audit failure, notably the 2018 collapse of construction giant Carillion. Due to cost overruns, delayed projects, and poor oversight, Carillion’s downfall affected thousands and left various public projects unfinished, leading to calls for stricter auditing regulations.

 

While Carillion is very much a worst-case scenario, there are still clear lessons for businesses to learn and reasons why it matters to take the upcoming legislation seriously. For example, ignoring these reforms could lead to severe reputational and financial damage, which could deter customers and prospective clients.

 

Failing to pass these audits could also have serious implications for future business activities, such as mergers and acquisitions. A failed audit can halt these processes, potentially derailing wider company growth strategies.

 

Automation to the rescue

There is no shying away from the fact that The Draft Audit Reform and Corporate Governance Bill will introduce stricter standards for businesses and their finance departments, particularly in the areas of auditing and transparency.

 

Therefore, it’s crucial for companies to take proactive steps now to avoid the pitfalls that have plagued firms like Carillion. To successfully navigate these upcoming changes, businesses must equip their financial departments with the necessary tools to become more agile, flexible, and efficient.

 

When planning how to achieve this, automation should be at the forefront of any strategy. By automating time-consuming and labour-intensive manual tasks, firms can eliminate the risk of manual error which can disrupt audits. It is essential to ensure there is accurate data across balance sheets, invoices and bank statements to comply with more through reporting requirements as auditors will be scrutinising financial records more closely.

 

For large companies who potentially have more rigorous auditing requirements – increasing investments in automation can help them spot miniscule anomalies or inconstancies across their extensive financial reporting – that more basic forms of automation might miss.

 

Beyond compliance, automation can establish a unified and intelligent approach to data collection, recording, and sharing within the finance team. For instance, implementing a centralised data repository or standardised data entry forms ensures consistent access to relevant information and helps maintain clear, demonstrable processes for auditors. This not only creates a clear audit trail of who has approved and paid which invoice, but also means that all financial records can quickly and easily be pulled for audits.

 

Much of the headaches around audits comes from the time it can take finance teams to manually locate and share relevant documents. Automation completely removes this drain on resources, with documents available at the click of a button.

 

Don’t put automation on the back burner

Audit reform is something businesses should embrace, not avoid. While it’s easy to get caught up in pursuing broader strategic objectives, overlooking the importance of investing in automation to support and enhance finance teams can be a costly mistake. Ignoring the needs of the finance department may cause these broader goals to falter, especially if the business fails to meet the auditing requirements outlined in the new legislation.

 

Automation is the key to seamlessly integrating these efforts, ensuring that businesses can comply with the new auditing standards while successfully achieving their objectives.

 

---

 

Sarah-Jayne Martin is Director of Financial Automation at Quadient

 

Main image courtesy of iStockPhoto.com and deepblue4you