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The Role of Auditing In Ensuring Organizational Effectiveness

Auditing is not a colloquial parlance; it is a professional terminology and as such, it requires professional definitions for the purpose of this piece. According to R.K Moutz, a reputable accountant:

“Auditing is concerned with the verification of accounting data in order to determine the accuracy and reliability of accounting statement and record.”

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Professor Jeff Clement, a renowned economist defines auditing broadly as:

“…a means of evaluating the effectiveness of a company’s internal control, maintaining an effective system of internal control with a view to achieving company’s business objectives, obtaining reliable financial reporting on its objectives, preventing fraud and misappropriation of its assets and minimizing its cost of capital.”

The Role of Auditing In Ensuring Organizational Effectiveness

From the above definitions, it can be observed that auditing plays an essential role in every organization by fostering and strengthening accountability, trust and confidence in every matter pertaining to finance.

One of the many benefits of audits is fraud protection which is achieved through internal controls that detect and prevent accounting irregularities. Thus shareholders such as regulators, investors, directors and managers get sound reassurance of how well their company is managed through proof of thorough financial statements which timely audits yield.

Audits can be performed internally by employees within an organization, or externally by statutory auditors or consultant auditors as the case may be. Organizations employ internal auditors to provide continuous review of the effectiveness of risk management, control and governance processes by providing independent, unbiased assessment of the operations of the organization while an external auditor examines the financial statements of an organization to determine whether they truly represent the organization’s financial position. External audits are performed because the law requires them and they are usually performed annually unlike internal audits which may be conducted throughout the year and which no law mandates.

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Furthermore, an auditor’s duty mainly is to verify compliance, conformance and performance; they review financial documents for accuracy and compliance with laws. Aside that, auditors are trained to spot and point out potential risks and propose preventive measures; and to provide objective assessment and informed views about how existing practices and procedures can be improved. In short, the main goals of an auditor are to increase operational efficiency, manage risk and ensure compliance with laws.

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Having considered the foregoing details, what really are the roles auditing plays in the efficiency and effective management of an organization? We shall consider this briefly.

  • Prevention and correction of Error: Oftentimes during the course of auditing, auditors detect errors in the company’s financial report which could be due to an innocent misstatement of facts and figures. Such errors could, and in most situations, spell doom for the company since company officials can neither provide reliable financial reports for both internal and external purposes nor can they effectively manage the company because of that error. There is no denying that numerous companies have gone under as a result of a lingering error which could have been detected and corrected by proper audits.
  • Detection and Prevention of fraud: Proper and regular auditing does not only detect and prevent fraudulent activities, it also exposes past frauds. As a matter of fact, auditing is a legal requirement for organizations that have the power to exploit financial information for personal gains e.g. financial institutions. No fraudulent employee or employer can thrive in any organization where regular audits are made compulsory and complied with.
  • Conservation of resources: An effective auditing procedure reveals how company resources are used and if there be any waste, where, when and from whom such waste is coming from. And if such waste is tackled adequately, the organization would save more, have more to invest and consequently experience operational productivity.
  • Workforce discipline and diligence: Regular and methodical auditing instils diligence and discipline into the staff of a company. Surely, no one wants to be found responsible for any error no matter how innocent it may be neither does any employee want to be prosecuted for fraud. Thus when every member of the staff demonstrates diligence, discipline and accountability in the use of the resources entrusted to them, the organization gets better for it.
  • Protection of shareholder interest: In joint-stock companies, the interest of shareholders cannot be dismissed. Hence, it must be protected through regular audits and release of financial reports. This gives shareholders peace of mind, trust and confidence in the management of the company and even the zeal to invest more becomes inevitable.
  • More investments: Every rational person wants value for his money and would rather invest in a company where transparency and accountability are taken serious. One way a prospective investor can spot such a company is by an official release of the financial statements which is a result of proper auditing. Financial reports show the financial position of a company and I would rather invest in a thriving company since “an auditing company is a thriving company.”
  • External auditing especially by a consultant auditor presents an advantage of access to invaluable professional advice on the proper management of accounts to prevent error, fraud and wasting of company resources. Professional/consultant auditors know better.
  • Proper audit provides information for accountants, tax collectors, financial analysts, property valuers and many other professionals to determine the value of an organization’s shares.
  • Also, audits strengthen the financial integrity of an organization.

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Financial issues are not trifling and that’s why auditors should be meticulous; they owe a duty of care to shareholders. Therefore, any negligence on their part resulting in financial loss to a shareholder could be a good ground for a lawsuit. A veritable example is the English case of Caparo Industries Plc v Dickman {1990} 2 AC 605 where the claimants, Caparo, were shareholders in a company and the defendant, Dickman, was the company’s auditor.

Relying on the financial statement presented by the auditor, the claimants bought more shares and took over the company. However, after taking over the company, it was discovered that the company had in fact incurred a loss of 400 000 pounds instead of the 1.2 million pounds profit shown by the financial statement. Aggrieved, the claimant sued and the English Court of Appeal held that the auditors were liable for any loss which results from their financial statement. This is the same position in Nigeria.

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Chidi Obialor

Chidi Obialor is an easy-going, smart and versatile law student who just loves to write! InfoGuide Nigeria is a team of Resource Persons and Consultants led by Ifiokobong Ibanga. Page maintained by Ifiokobong Ibanga. If you need a personal assistance on this topic, kindly contact us.

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