If you also believe in the so-called bigger picture concept as being mythical, welcome to the club. But to me it’s not just that because it’s practical manifestation, seems it’s meant to deceive. And if you think there’s nothing wrong in fancying about it, let me decipher it to you here and now, unless of course you believe in it, because if you do, you’ll never see the real picture!
It’s not as if the ideation behind was also meant to be deception. It’s definitely about its use that has regressed it to be an escape from the real picture or an avoidance of reality. The idea was to comprehend how things move in terms of the larger scheme, how efforts and effects interact in an overall perspective.
And it was imperative as well. Because usually we drain our energies in the tiniest of the details, that we lose out on the fact if these matter at all. This is especially true of auditors, who, in their bloodthirst, go for the faintest of findings conveniently forgetting if these are impactful in any way in terms of value addition.
But does this mean that attention to the minutest of detail should be avoided? Certainly not, as the devil is in the details. Being cautious and through in assessment is equally important, since we can never be sure on what exactly would constitute the bigger picture.
Let’s think of this in terms of the internal control systems of an entity. For both sides of the spectrum, a rudimentary system at one end and a highly sophisticated system at the other, there are intricacies that make it impossible to chart out a standard course to comprehend the bigger picture. So how do we grasp that bigger picture unless we’re sure about the minutest details that go into making that system work or as the case maybe, fail?
Exactly we don’t! In order to comprehend the overall control system as the bigger picture for instance, we need to be fully aware of the components of the system and how these interact with each other. The policies and procedures, the competence and quality of resources in charge of operations, monitoring and supervision, the understanding of risk, the criteria for evaluating performance, etc. all need to be understood to make sense of what the control system is or is not achieving. These make up the real picture.
And when something is amiss, the causation assessments and recommendations also need to go down to the components level to make an objective evaluation first and impactful improvements finally. After all, it’s those small moving parts that make the clock work!
Let’s now take the example of the accounting concept of Materiality. What started as something for which reasonable expectation and use of judgment from the perspective of users of financial statements (the bigger picture!) held sway, now necessitates an objective basis of determination. For this purpose, components of financial statements like revenue and profits are used to determine what is material and what’s not.
But we do need to be sure about the transactions making up the revenue and consequently the profit that these aren’t misstated too! Thus, the auditors go about deploying their audit approaches and their sampling methodologies to test the components and obtain assurance on these components being accurate and adequate accounts of the business transacted. The bigger picture relies on assurance obtained on transactions going into the financial statement components! Yes, broken down to that level.
But there’s another important aspect here that need not be missed. The concept of materiality doesn’t encourage immaterial misstatements in the financial statements. The idea is to aid the user (shareholder, investor, any stakeholder) make well informed decisions about the health of the business entity by focusing on what’s material only. In no way it ‘encourages’ or ‘permits’ irresponsible accounting leading to immaterial misstatements or omissions.
In the context of accounting and financial reporting, reporting is the bigger picture setting standards for presentation and disclosure, while accounting as the real picture sets standards for recognition and measurement and thus represents the core components making up the bigger picture. Its true materiality applies to recognition and measurement too. But again, it doesn’t suggest deliberate, or incompetence-based pervasive inaccurate accounting.
Would you rely on a feel-good bigger picture without placing sufficient and appropriate assurance on the underlying real picture? Certainly, we will, if the objective is to deflect attention from the real picture or if reviewing and analyzing the bigger picture gives us a sense of elation, enhances our brand image and is good for business.
And that’s exactly what is happening with financial reporting and external auditing. The financial reporting is the bigger picture which is becoming uber-complex under the notion of ease for users of financial statements. It complements the need for fancy external auditors who could sell their financial statements presentation and disclosure expertise at meetings, setting a cycle in motion.
You might wonder what could be wrong with financial reporting becoming increasingly advanced and being the focal point for businesses? Nothing of course, except that we’re drifting away from the real picture. Accounting precedes reporting and it is the most significant financial control an entity has. If accounting is undermined, the real picture is tainted, irrespective of how amazing the bigger picture looks!
The external auditors were required to obtain and provide assurance over the accounting system as a means to produce credible financial information. Testing of the Internal Controls over Financial Reporting (ICFR), Financial Statements Close Process (FSCP) were typically external audit domains. However, assurance over these is now compromised thanks to the convenient understanding of materiality and the renewed focus on reporting.
But thanks to internal auditing, the space conceded by external auditors has been taken up as a challenge by the internal auditors unfettered by any materiality considerations or look good optics. We continue to examine and report anything and everything with ratings aligned to heat maps.
I’ve witnessed how the bigger picture optics and gimmickry play out exceedingly well in the meeting as external auditors captivate their audience on the requirements of newly minted reporting standards or the revised / updated requirements of the standards already in issue and the resultant impacts on the financial statements.
Meanwhile, the accounting system fails to attract even half the attention as afforded by reporting. As a result, it doesn’t matter if accounts do not summarize correctly, or accounting treatments are ridiculous, or entries are suspect or even if certain control requirements do not exist!
The bigger picture allows for great deception! So, if an entity’s only concern is a look-good (read bigger picture) compliance of the newly issued sustainability disclosure standards, it may ask external auditors to do the needful.
But if entities need to align reporting to those standards as well as assessing and aligning their accounting system and lifecycle sustainability, internal auditors are the ones carrying the real picture, entities cannot and must not shy away from!
External auditors fully comprehend their worth of being the necessary evil for businesses in terms of costs of assurance over historical financial information.
They had one job of gaining and giving assurance over the truthfulness and fairness of financial statements, but instead they chose to play through regulators and standard setters for keeping their self-serving need intact and the costs of compliance high for the entities they call clients.
And yes, they suck!