Net Positive: ICJCE Study Finds that Audited Companies Recover Earlier from Economic Crises

We know that audits and assurance are intended to help strengthen public confidence and support countries' transparency efforts. Yet we continue to see the debate around which companies should or should not be obligated to undergo an audit. At the Instituto de Censores Jurados de Cuentas de España (ICJCE), we believe one reason for this, is because not enough research has been done on the effect that audits can have on a companies' performance.

To provide empirical data to this debate, the Universidad de Alcalá de Henares and the ICJCE carried out a study entitled Auditing of Accounts in Companies (the full report is in Spanish with a link to the executive summary in English available here) that analyzes the behavior of close to 90,000 Spanish companies with operating revenues of more than 500,000 Euros. One third of the companies analyzed (34.22%) audit their annual accounts and two thirds (65.78%) do not.

The conclusions of the study are very clear: those companies that audit their annual accounts recovered faster from the 2008 crisis-indicating the positive effect of an audit on a company's performance. In the second part of the study, which will be issued by the end of 2021, it is also empirically demonstrated that there is a direct link between being audited and higher profitability levels.

Indeed, the study reveals that the turnover of audited companies grew more and recovered faster from the 2008 crisis than that of non-audited companies. Based on the report, between 2008 and 2018, audited companies increased their average sales by 16.43%, while non-audited companies only increased by 6.6% - 9.83% less.

Notably, it took audited companies eight (8) years to recover to their level of revenues they had at the start of the crisis in 2008, while it took nine (9) for non-audited companies. Considering the current economic scenario worldwide, this is a significant factor that companies might wish to consider.

The benefits are also reflected in other areas of performance, such as creating jobs: the average annual rate of increase of the number of employees over the ten years analyzed was 1.4% for the audited companies and 0.3% for non-audited companies. Audited companies grew by 1.1 percentage points more than the non-audited entities. The conclusion is that companies that audit their accounts increased their average number of employees by 14.23% in 2018 compared to 2008, close to 12 percentage points more than non-audited companies and recovered to their average number of employees in 2015, while non-audited companies did not reach the same level until 2017.

The study also provides new data about the contribution of audits of accounts to small and medium entities (SMEs), which make up almost 95% of the business landscape and are not obligated to undergo an audit, and the need to adapt technical standards to the work performed in these audits. The results show that audited SMEs are more profitable, better reflect the value of their assets in the balance sheet and can withstand an economic crisis better than their non-audited counterparts. In this regard, the average sales of audited SMEs increased by 15.8% between 2008 and 2018, while this increase was only 6.55% for non-audited entities. Additionally, the audited SMEs increased their average number of employees between 2008 and 2018 by 9.86% and the non-audited SMEs by 2.68%. Audited SMEs and non-audited SMEs had a similar profitability in 2008 and 2009, but from 2009 onwards, audited SMEs had higher profitability.

Each year, more than 60,000 entities are audited in Spain by audit firms of all kinds, where it is estimated that more than 50,000 professionals work. As the PAO representing and promoting the auditing profession in Spain, ICJCE believes that this type of research benefits both companies and our membership by providing data-driven information that communicates the value of audits and auditor's services. We look forward to releasing the second part of our study.

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