Auditors demanding more rigorous internal investigation as part of year-end procedures

As auditors ramp up their scrutiny over the scope and quality of internal investigations, organisations should proactively plan to address and manage potential issues that could have a material financial impact.

In the UK, auditors are increasingly requiring more fulsome investigations before signing off accounts.

The audit expectation gap has always existed, with the cry “where were the auditors?” frequently arising. Recent corporate failures have made this issue more prominent. These gaps have been underscored by large-scale corporate collapses due to fraudulent practices, including falsified information provided to auditors. Additionally, regulatory requirements are driving auditors to adopt a more stringent approach with clients, especially when there is suspicion of wrongdoing or irregularities in financial information.

Issues requiring investigation often emerge during the year-end process when time is limited, and there is significant pressure on organisations to finalise accounts to meet filing deadlines or market announcements. Investigating these issues can consume substantial management time, and if not managed effectively, this can escalate further putting significant strain on an organisation’s time and resources.

Auditors have ethical obligations and must review non-compliance with laws and regulations (NOCLAR), a process outlined in the International Ethics Standards Board for Accountants (IESBA) Code of Ethics since 2016. Auditors, along with in-house forensic accountants and other experts, aim to understand the material impact and potential harm to stakeholders of relevant issues identified, as well as assessing the completeness of any investigations and advice, and any concerns over the integrity of management and representations made by them.

Auditors will adopt a robust approach to understanding investigations into various potential issues. These include, but are not limited to, bribery and corruption, false accounts, falsification of accounting records, insider dealing, money laundering, and sanctions breaches. Essentially, anything that could materially impact the financial statements of the entity being audited will be of high interest to the auditors.

It is crucial for organisations to work closely with their in-house legal team and external advisors during any investigation to ensure there is a robust but proportionate response in dealing with investigation queries raised by auditors. To mitigate risks and increasing costs of such investigations, it is important for organisations to scope, agree upon and execute investigations in consultation with their auditors. A collaborative approach will always lead to better outcomes for both the organisation and its auditors.

Co-written by Hannah Bragg of Pinsent Masons.