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Assurance

5 ideas for getting more benefits out of the work done by auditors

Mart Nõmper Mart Nõmper 09 Mar 2020

Auditors are like conspirators – people know they exist, but few understand what they are up to and why they are valuable. In general, the public hears about auditors only when something goes wrong somewhere.

About 6,500 companies in Estonia are required by law to be audited. These undertakings generate about 80 per cent of Estonian economic output, hold about 80% of the assets of all businesses in Estonia and employ 60 per cent of Estonian employees. Few realize how large a share of the assets and income used in enterprise has actually been examined and approved by auditors. An audit gives anyone reading a company’s financial statements greater confidence that the information in the reports is as required. Giving assurance – this is precisely the main contribution auditors make in our business environment. It would be no exaggeration to say that in the last 30 years, Estonian auditors have done much to make Estonia’s business environment a trustworthy one.

The work of auditors would be even more beneficial for society if it were more visible. To that end, here are a few specific suggestions to take into account in reforming company law, establishing the Commercial Register Act and developing a digital society generally geared to transparency.

5 ideas how auditors work would be even more beneficial for society

  1. The basic data available for free in the Commercial Register includes basic parameters from the annual report filed by the company. It would be very important to add information whether the company has undergone an audit or review and whether the company has commissioned an audit or review voluntarily or because one was required by law. Requesting the services of an auditor voluntarily shines a positive spotlight on companies that are prepared to make an effort greater than the minimum required by law in order to raise the quality and trustworthiness of their reporting. This is praiseworthy!
  2. The free public data set in the Commercial Register should include which auditor provided the service and for what period. It is important to show information for at least the last three to five years so that potential change of auditor would also be documented. Overly frequent changes in auditor should raise a red flag.
  3. The result of the audit (whether it was an unqualified report, or resulted in a qualified opinion, disclaimer of opinion, or adverse opinion) should also be displayed among the free public data in the Commercial Register. The auditor’s opinion itself, with its more detailed account of the circumstances that led to the opinion, can remain behind the paywall. But noting the fact that an auditor performed an audit and highlighting the overall result is useful for companies performing due diligence with regard to their transaction partners.
  4. Based on the above, the Commercial Register could use colour-coding to categorize the companies. Red would indicate an adverse opinion or a disclaimer of opinion. Orange would stand for a qualified opinion. Green, of course, would be an unqualified opinion, and grey would show that the company’s financial statements have not been audited. Highlighting the result of an audit more clearly will start shaping public opinion and every self-respecting company board will start striving toward green status.
  5. Instead of owner’s equity or share capital, the free basic data in the register should show total equity, total assets and total liabilities according to the latest annual report. Capital paid into a company years ago, often back when the kroon was still the currency of Estonia, no longer has any real importance in taking decisions and does not show the owner’s actual contribution to the company. Total owner’s equity shows the size of the owners’ contribution, while total liabilities show the amount of external capital invested. The ratio of equity to debt can be used by any discerning information consumer to understand the company’s financial leverage and magnitude of risk level.
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