Did you ever wonder why an examination of financial statements is called an “audit”? The word “audit” has its roots in the Latin word, “audire,” which means “to hear.” What does an examination of financial statements have to do with hearing? The answer is, in the 12th century, during the reign of Henry I, when literacy outside the church was rare, the person who was responsible to account for revenues and disbursements on behalf of the crown was called an “auditor” because verifying transactions primarily involved hearing oral testimony. “Who remembers the sale of sheep to the king’s estate?” an auditor might have asked.
In many respects, current practice for public companies is relatively unchanged. Companies prepare financial statements on operating results and financial position at the end of the last quarter, these are examined by external auditors who provide assurance – typically on the annual report – that the financial statements were prepared in compliance with generally accepted accounting principles (GAAP) and “present fairly” the results of operations and financial position. Then the statements and audit report are released to the public, generally a month or more into the next quarter.
Like the term “audit,” however, much of the current practice reflects historical conditions that have been overtaken by advances in technology. Today, when terabytes of data can be analyzed in seconds and accessed in real time on tablets and smartphones, why does it take companies a month or more to close their books, and why is the information typically limited to historical financial data? There’s nothing that prevents innovative businesses from taking advantage of advances in technology to disclose more timely and meaningful information, including non-financial data that is not traditionally subject to audit. Such information might include, for example, same-store sales reported daily, website traffic, “likes,” net promoter scores, and other measures of customer satisfaction, milestones in the development of new products and services, and measures of brand value.
The audit profession is already starting to take advantage of predictive analytics to detect fraud; and new standards, systems, and controls will evolve to address non-financial data. Compliance with accounting principles in the preparation of historical financial statements is table stakes. In the future, it will be the disclosure of more timely and more meaningful information itself that will create business value and differentiate the innovative businesses in attracting customers, partners, and investors.