So, just how reliable are those audited figures?

David Hawkins, PAID Division.

12th April 2019.

It has been reported that MPs sitting on the on the Business Energy and Industrial Strategy Committee of the House of Commons have taken time off from Brexit and looked at the structure a
and performance of major accounting firms.

The Committee is likely to recommend that consideration should be given to the break up of the ‘Big Four’ firms of accountants – KMPG, Deloitte, PwC and EY– whereby the audit and accountancy functions of the major accountants should be totally separated from their consultancy activities.

This follows some sensational auditing lapses in recent years – notably associated with corporate disasters such as Carillion and BHS , and Tesco where serious accounting shortcomings
on the part of auditors have contributed to subsequent corporate failure or scandal.

The problem is not new. Older hands will recall the swingeing criticism directed at auditors and other City institutions involved in the Robert Maxwell affair in 1982. There are numerous other
examples.

In days gone by credit managers were wont to draw comfort from the fact that a company seeking extended credit had “big name” auditors. You could gain confidence from the mere fact that such
alumini had been appointed.

Not only were the accounting figures likely to be sound and conservative, but the mere presence of such an auditor meant that the potential purchaser had
good internal accounting systems so that the business was well controlled Of course, in many cases, this remains true.

The vast majority of accounting firms, large and small, are of considerable integrity and provide accounting service of the highest quality. But the scandals in recent years have inevitably reduced confidence amongst credit granters.

Fortunately, help is at hand. In tandem with the development of these difficulties, technology has made on line credit information available to even the smallest supplier at a reasonable cost. The
credit report will tell you who is the auditor is. But more importantly it will provide much more than the audited figures.

At the flick of a switch, the credit granter can see how long the company has been in business, whether it submits its accounts on time. Whether the directors have a history of failure in other businesses. Whether the business has incurred, and perhaps not settled, county court judgements – these are immediately apparent.

Also of course, the report will show provide profit and loss and balance sheet analyses from which a wealth of data can be obtained – often for a four or five year period, together with the key ratios
that address say, cash flow, profitability and return on capital employed.

Thus the supplier can see quickly whether the business is financially sound and can detect trends in profitability and cash flow over an extended period.

The figures may well have been prepared to present the subject company in the very best financial light, but the major trends, good and less good, cannot be concealed entirely.

So without doubt, the credit granter is in a far better position to make sensible decisions now than hitherto. The identity and prestige of the auditor becomes practically irrelevant – what matters is
the wealth and timeliness of data.

CPA provides top quality credit reports upon every company registered at Companies House in the UK. They are competitively priced and available on line.

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