Accountability is a crucial aspect of every entity. In business, managers are accountable to the board of directors in one vein. Next, the board of directors account to the shareholders. It is as a result of these, auditors must ensure that managers and directors comply with this concept. Auditing the firm’s financial reports is one way to achieve this Let’s crack this down.
What is Accountability?
It simply means the act of providing response by managers and directors for the way and manners it deals with the business resources. You may define accountability as to provide answers for how resources given to management by shareholders are utilized.
An Example of Accountability
Accountability is similar to talent explained in a holy book. Here, the master (shareholders) gives talents to three of his servants (management). Each of them were to give an account to the master on arrival for his journey. Upon arrival, only two of the slaves used the talents and earned from it. The third one buried it and gave the talent to the master. The master, therefore, gives the ungrateful servant’s talent to the one who makes more profits.
This example is similar to what goes on in an entity. Talents or business resources (money, machine, man, information) are provided by the shareholders to management. The business directors and managers are expressly accountable for what they hold in trust.
How are management Accountable?
Managers and directors show accountability by providing reports to the shareholders. These reports can be monthly, quarterly (every three months), biannually and yearly. Weekly or monthly reports are usually provided by managers to the board of directors. The primary reports are cash budget and account receivable schedule. They may also send monthly financial statements in the format prescribed by the board.
Managers also prepare quarterly and yearly reports to directors. These are monthly financial statements and budget. Directors mostly prepare quarterly and yearly reports to shareholders. Financial statements are the most wanted reports prepared by the board to show Accountability. Yearly financial projections are also prepared by them. Large entities do delegate the preparations of financial statements to an accounting or audit firm. When this is the case, it is important that the auditor that prepares the financial reports do not audit them. If these rules are not complied with, it could affect the objectivity of the auditor.
Auditor’s role in Accountability
It is possible for managers and directors to collide and provide doctored reports. Also, such reports may be prepared to suit a particular group of users. For example, the financial statements may be prepared to attract loan from bank or an issue of bond. Or it might have mismatched the report. This will lead to incredibility and compliance issues. A financial report that is not credible may affect the company’s shares price as listed in a stock exchange.
Meaning of the Objectives of an Audit and Key Explanations
It is the job of the auditor to ensure accountability on the part of the management. With the help of the internal control department of the organization, external auditors can ensure compliance of the entity’s policy. The auditor on his part should ensure that financial statements represent what it is purported to represent. It should be fair, unbiased and free from material errors.
The auditor also ensures that financial reports are International Financial Reporting Standard (IFRS) compliance. Also, regulations, prudential guidelines and other laws within a country are adhered to when preparing such reports.
Accountability in auditing is about answerability of management to shareholders on the resources entrusted to them. When managers and directors are accountable, it will be clearly reflected in the financial reports they prepare. Auditors have a great role to play in ensuring accountability. This will in turn affect the credibility of the entity.