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January 15, 2013

Sharing auditors’ insights into the retail sector

In the wake of the financial crisis, questions have been asked about the value of audit. While there is little doubt that audit is essential for the efficient working of capital markets, it became clear that auditors need to get better at demonstrating how they add value. Making more people aware of what auditors do and sharing the knowledge, expertise and insights of auditors are some ways of doing just that. And this is exactly what we are trying to do with a new series of reports by ICAEW’s Audit and Assurance Faculty entitled Audit Insights.

The first report in the series concentrates on the retail sector. It is based on the knowledge of audit experts with clients in the sector and focuses on the issues they have been highlighting to their retail clients. In it, auditors warn against over-reliance on like-for-like sales data in the retail sector.

The Christmas retail sales figures of major retailers have been a much-anticipated and hot topic in the media over the past week, with much emphasis being put on whether sales are up or down compared with the same period last year. However, while like-for-like sales are one key way of measuring how retail companies are faring, this KPI is not always consistent (in many instances it is more like comparing apples with pears than apples with apples) nor directly linked to profits (extreme discounts can increase sales but won’t necessarily increase profits). Therefore, it is important not to read too much into these data.

Retailers apply judgment when they decide which data are included in the like-for-like calculations and the decisions made are not always clear to the outside world. Greater transparency around judgments made could benefit investors and a standard method for calculating like-for-like sales would create a far more reliable tool for decision making – both for the retailers themselves and for their investors.

Among the other key issues in need of attention highlighted by the auditors in the report are the underdeveloped IT and data management systems in the sector. The retail sector lags behind other sectors in this area and the state of their systems makes it difficult to get a proper understanding of profit drivers and manage working capital. Another issue raised is the challenges posed by the changing retail landscape in relation to managing property portfolios. This is also linked to the issue of data management, as without proper data, it is difficult to assess and compare the value of store sales with online sales, for example.

These are difficult times for retailers. However, by highlighting some of the main challenges faced by the sector – as flagged by the auditors through their unique access to information through their audit work – we are hoping the report can contribute to important debates within the sector, allow a greater group of stakeholders to benefit from the auditors’ knowledge and also increase the understanding about what auditors do.

The retail report will be followed by others looking at different sectors during the course of 2013.

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