Appointing a statutory auditor is one of the few decisions a company makes for several years at a time. Done well, it brings a disciplined outside eye that reassures shareholders, lenders and partners. Done hastily, it produces a signature on the accounts and little else. Here is how we suggest approaching the choice.
When is a statutory auditor required?
In Djibouti, the Commercial Code makes the appointment of a statutory auditor mandatory for public limited companies and for other companies that exceed thresholds of turnover, balance sheet total or headcount. Banks, insurance companies and regulated entities are subject to additional requirements from their supervisor. Many companies below the thresholds also appoint an auditor voluntarily, either because a shareholder or a lender asks for it, or because a parent company abroad consolidates their accounts.
The auditor is appointed by the general meeting for a fixed term and can only be removed for cause. This protection is the counterpart of independence: an auditor who cannot be dismissed for delivering an unwelcome opinion is an auditor whose opinion is worth something.
What the engagement really covers
The core of the engagement is the audit of the annual financial statements, conducted under international standards on auditing, leading to a report that expresses an opinion on whether the accounts give a true and fair view. Around this core the auditor performs a number of legal duties: verifying the information given to shareholders, reporting on regulated agreements between the company and its directors, attending general meetings, and alerting the management when the continuity of the business is at risk.
An audit conducted properly also produces something the law does not require but every manager values: a letter of recommendations on internal control, listing the weaknesses observed during the work and suggesting practical improvements. In our experience this letter is where the return on the audit fee is found.
Five questions to ask a candidate firm
First, who will actually do the work? Ask to meet the partner who will sign and the senior who will lead the fieldwork, and ask how many hours each will spend on your file. Second, how does the firm approach risk? A serious auditor will want to understand your business, your systems and your key judgements before quoting, and will explain where the audit effort will be concentrated and why.
Third, what is the firm's independence position? Ask whether it provides, or intends to provide, bookkeeping, tax or consulting services to your company or to companies in your group, and how it manages the resulting conflicts. Fourth, how does the firm communicate? Ask to see an anonymised example of a management letter and ask how often you will hear from the team between year ends. Fifth, what is the firm's experience in your sector and with your type of stakeholders, whether a bank, a donor, a foreign parent or a public shareholder.
Fees: what a fair quote looks like
Audit fees are a function of the hours required, which depend on the size and complexity of the company, the quality of its accounting and the risks identified. A quote that is markedly lower than the others usually means that fewer hours will be spent, which in turn means a lower probability of finding what matters. A good proposal states the planned hours by grade, the timetable, the deliverables and the conditions under which the fee could be revised.
An audit is only as good as the hours spent by people who understand your business.
Preparing the relationship
Once the auditor is appointed, the quality of the audit depends as much on the company as on the firm. A closing timetable agreed in advance, a complete set of schedules supporting each balance sheet caption, and a single point of contact in the finance team reduce both the cost of the audit and the number of surprises. The best audits we have delivered were those where the client treated the audit as a project with a start, an end and a shared plan.
AXIAL Advisory & Audit acts as statutory auditor for companies, banks' clients and foundations in Djibouti. If your company is approaching the thresholds, or if your current mandate is coming to an end, we would be glad to discuss how we work.
Related services : Statutory audit · Contractual and internal audit