How Company Size Shapes an Audit

The people who meet the auditor, their attitude towards the audit and their ability to prepare information differ from one company to another.

One of the first differences I noticed on entering a company as an auditor was who took part in interviews. At large corporations, I mainly spoke with the employee responsible for the account. At startups preparing for an IPO, I often discussed matters directly with the CFO or head of finance.

This was about more than the other person’s job title. It also revealed how the company viewed the audit, who made judgements on accounting issues and who could prepare the information needed.

1. Interview participants

At large corporations, it was not easy to meet regularly with finance team leaders or executives. They had many responsibilities beyond the external audit and could not continually make time for auditors. Day-to-day questions and requests for information naturally went through the employees handling the work.

That did not mean those conversations were inadequate. Having worked with the account and the company’s operations for a long time, employees could often explain the background to transactions and the structure of the records in detail. Matters requiring a company-level judgement or response, however, had to go through internal reporting.

At startups, the CFO or team leader often participated directly in interviews. The organisation was smaller, and the ability to make complex accounting judgements was sometimes concentrated among a few senior people. With the person explaining the background and the person deciding the company’s response in the same room, the discussion could move quickly.

2. Attitudes towards the audit

Companies also differed in how they viewed the audit.

A large corporation that has undergone external audits for many years already has a familiar timetable and ways of responding. It has some idea of which records to prepare and what auditors will ask at each stage. For employees with substantial day-to-day responsibilities, the audit can feel like another annual task to complete.

In some of the companies I worked with, the audit was treated as an annual event that everyone hoped would pass without major problems. It was less a failure to recognise its importance than a burden returning every year when there was already plenty to do.

The startups preparing for an IPO had a clear goal of listing. Resolving accounting issues and developing financial reporting processes were connected to the company’s next stage. I could feel management’s willingness to make time for the audit and address the issues raised.

This reflects the company’s circumstances as well as its size. The startups in my comparison were specifically preparing for a listing. Attributing their engagement simply to being small would overlook the difference made by the IPO objective.

3. People and systems

Active management involvement did not always make the audit straightforward. I often felt the strength of large corporations in their ability to prepare and explain information. Their experienced employees understood accounting standards as well as the company’s transactions and systems. Even without a senior title, they had considerable experience in their own areas, which showed in the financial statements and supporting information they provided.

There were also substantial differences in ERP systems and closing procedures. Long-established systems and organised ways of working mean that finding and explaining information need not depend entirely on one person’s memory. That foundation is difficult to build quickly.

At a startup, even when management was readily available for a discussion, preparing the records to support its explanation could take more time. If the finance team and its working practices were still being developed, key people also had more to handle themselves. A discussion could move quickly while the information took longer to prepare.

The following table brings together the differences I experienced.

4. The auditor’s perspective

Understanding these differences helps explain where time may be needed. The follow-up discussion will differ depending on whether the work is waiting for management’s judgement or there are too few staff available to prepare the records.

An engaged management team or well-established systems cannot, by themselves, support an audit conclusion. The auditor still needs to hear the explanation, examine the relevant records and assess whether they support the accounting and the conclusion. For example, paragraph 17 of Australia’s ASA 200 requires the auditor to obtain sufficient appropriate audit evidence. ASA 200 – Overall Objectives of the Independent Auditor

The differences I felt are difficult to reduce to a judgement that one type of company is more cooperative or better to audit. Large corporations had accumulated expertise and systems; startups preparing for an IPO offered close communication with management and a clear objective. As an auditor, I found those strengths helpful in different ways.

The organisational differences I felt during audits took another form in advisory work. The relationship between the client and the accounting firm, and the final deliverable itself, were particularly different. The final article explores that experience.