Trust is an essential ingredient in all types of negotiation. When one party makes an offer, whether it be on the purchasing or vending side, there has to be a degree of trust in their ability to either pay or deliver the goods or services promised.
In an ideal world, we’d all be able to take people at their word. But it isn’t a perfect world, and when big sums of money are involved, etiquette has to give way to pragmatism. Most organisations would agree it’s only sensible to ask for proof that another party can deliver what they promise.
That is what financial assurance is about, built on the foundation of formal auditing procedures. Auditing provides third-party verification that financial declarations and disclosures are accurate. This establishes a factual basis on which parties can judge the ability of others to meet financial obligations.
Beyond looking at purely financial matters, assurance audits often also have a compliance element. For many organisations, especially in the public sector, establishing that suppliers meet the regulatory standards on which they are judged is an important aspect of governance.
So when are you most likely to be asked to undergo an audit for assurance purposes? Here are five scenarios when financial assurance audits are commonplace.
Securing contracts
In industries like construction or waste management, firms are often required to provide financial assurance to win contracts. The purpose is to establish that the business has the resources to complete the project as promised, or to highlight if there are any risks of it not being able to deliver. An audit might be tied to specific deliverables or conditions in the tender, and non-financial reporting and governance might also be assessed to check they meet regulatory standards.
Taking on public funds
Public tenders often require applicants to go through an assurance process. The same is true if an organisation receives government grants or loans. The auditing process might be required before the award is made, to check the recipient has reporting structures in place that match the strict standards often applied to public funding, or to examine evidence submitted in the application. Public grants are often audited post-award, too, to check the money is used in the ways specified.
Environmental regulations
Assurance doesn’t always have to be linked to transactions and negotiations. Environmental regulations require an increasing number of businesses across different sectors to have robust reporting procedures in place for things like carbon footprints and energy efficiency. There’s a financial aspect to this whenever organisations are required by law to demonstrate they can cover the cost of environmental protections.
Holding client funds
Law firms, estate agents and other business entities may be required to handle money on behalf of customers and clients outside the scope of a sale transaction. A good example is holding the deposit in a property sale before it is formally transferred from the buyer to the vendor. This is known as holding money ‘in trust’, and firms that do it often have to submit to assurance processes to demonstrate they have adequate protections in place.
Public offerings
Finally, ahead of floating on the stock market, any company planning on ‘going public’ is required to undergo a rigorous financial assurance process. This is at the behest of the investment banks that underwrite the initial public offering (IPO), and is to ensure that investors are not taking an undue risk with their backing by a) checking the business is viable and b) setting an appropriate share price.
Please contact us to find out more about our audit and assurance services.
