Auditors have the fiducial and moral responsibilities of ensuring that the financial records present a true and fair position of the company. Whereas this reporting is the expected norm, in practice, auditors’ independence is at times compromised due to various conflict of interest that arise during the auditing process. This paper will give a review of the audited financial reports presented by Nestle in 2015 and determine the accuracy, fairness of figures, transparency, and conflict of interest between the management and auditors personal goals in the presentation of these reports.
The accuracy of the financial records is an important aspect of creating reliability on the auditor’s report. In light of this, the financial reports should be able to reflect arithmetic accuracy in terms of the sum of values used in the preparation of accounting records such as the income statements, balance sheet, and consolidated accounts. In addition, there should be accounting accuracy in the sense that the sum of all the assets should be equal to the sum of liabilities and equity. Similarly, an acquisition of property such as machinery should reflect a similar impact on the company’s plant property and equipment account. There should also be accounting for matters affected by this change such as depreciation or revaluation of different assets.
The accounts reported by the auditors have followed the accounting rules stipulated by Swiss law, the 32nd title of the Swiss Code of Obligations, where the company is registered. There is consistency in the manner that the company classifies its accounts for 2014 and 2015, in the balance sheet, income statements, and cash flow statements (Nestle, b, 64-66). This consistency is essential for comparison. In addition, there are adequate disclosures of all assumptions and adjustments made in the calculation using notes. There is also no significant variance on the company’s assets, liabilities, and capital on the 2014 and 2015 financial year. Therefore, the income earned by the company is consistent with the company’s past performance.
Transparency is an important aspect of accounting, which enables shareholders and other stakeholders to observe all the factors that affect a business. In order to ensure there is transparency, auditors must make adequate disclosures of the accounts that they have reported (Johnstone, Gramling, and Rittenberg, 87-92). They must use notes to explain any abnormal changes or unclear accounting in the business. In the audited financial statements, KPMG ensured that there were adequate disclosures on the various transactions that the company.
The auditors provided sufficient notes, which indicated the changes in the accounting procedures as well as the underlying reasons for these changes. In the notes of the accounts section, they indicated the accounting policies that were used in the financial statements. In addition, they also had notes regarding the first-time adoption of new accounting law. In particular, these changes were due to the inclusion of new provisions in the Swiss law concerning the accounting and financial reporting regulations. These changes were on the calculation and disclosure of expenses of group companies in the income statement. There were also changes in the classification of administration and other expenses. The notes also explained the new classification of financial assets. There were also explanations concerning short-term payable treasury shares and provisions.
Other disclosures that the report stated were on financial currency translation, taxes, shareholdings and financial assets, as well as those on property plant and equipment. In addition, the company had disclosures on hedging practice used in the company, the income statement, intangible assets, provisions, prepayment and accrued income, and accruals and deferred income. The aforementioned notes were on accounting policies. Other notes that the company noted were on income from group companies, profit and disposal of assets, financial income, expenses recharges from group companies, write-downs and amortization, financial expenses and taxes. There were also notes on other current receivables, financial assets, shareholding, interest-bearing liabilities, other current liabilities, provisions, share capital, changes in equity, reserves for treasury, treasury shares, and contingencies. Finally, there were notes on events after the balance sheet date, full-time equivalents, performance shares, as well as shares and stock options (Nestle, b, 162-164). All these notes explained all the accounting methods and principles applied in the financial report. Accordingly, it ensured that there were adequate disclosure and transparency of the financial records.
Fairness of Figures
Fairness of figures aims at ensuring that the valuation of the company by shareholders is realistic and accurate based on the information provided in the financial statements. In this regard, an accountant should provide accurate estimates on provisions for bad debts, losses, and contingent liabilities. There should also be adequate disclosures on the accounting records as well as estimates used in the calculation.
The financial information presented on Nestle provides a fair view of the company. To begin with, these reports are presented according to the financial regulations that have been established by Swiss accounting regulations. In addition, the company has allocated adequate provisions for bad debts. In addition, the company has also allocated enough provisions for contingent liabilities such as legal suites. Finally, the use of hedging and its disclosures indicates that the company financial performance is fairly safeguarded from the shocks in the market. In addition to the above, there is a consistency in the business performance of Nestle. The income statements, for example, indicate that the income that the business earned in 2015 and 2014 were almost equal, if the income portion, earned from disposals in 2014, was eliminated during this year. Further, there are adequate explanations for this occurrence (Nestle, b, 64). Therefore, the financial statements present a fair view of the company, since a business performance should illustrate consistency.
Conflict of Interest
Conflict of interest is an important element in the determination of the accuracy of financial statements. Normally, conflict of interest arises due to potential financial or non-financial gains that an individual can make in a particular contract. Simply, conflict of interest may arise where the management engages in related party transactions. It can also arise where they are to get bonuses if they make certain desired amounts of profits. From the side of the auditor, it may arise from the offering of attestation services such as accounting and investment service. Similarly, long financial contracts may be a source of conflict of interests.
Despite the proper presentation of the financial records, there is a possible conflict of interest in the presentation of this annual report. KPMG, who are the auditors of Nestle, have had a very long working partnership with the company. As early as 1993, the company was offering audit service to Nestle (Nestle a, 32). This contract was again renewed in 2013 and it included the provision of audit service and attestation service search as due diligence on mergers, tax, business risk advisory, and IS/IT advisory support. The conflict of interest arises on how KPMG will be able to competently audit mergers that it has advised on their establishment. Moreover, the long audit contract creates a familiarity threat in the relationship between KPMG and Nestle.
As for the directors of the company, they held a significant proportion of the company’s shares. Although ownership of shares is important in order to ensure that they have an interest in the proper management of the company, too much share ownership may create self-interest threats. In regard, the management may be compromised to make decisions that have high short-term benefits over those that have long-term benefits for the company.
Johnstone, K., Gramling, A., and Rittenberg, L. Auditing: A Risk Based-Approach to Conducting a Quality Audit (10th Ed.). New York, NY: South-Western College Publishers. 2015
Nestle a. Nestle Annual Report 2013. (2013). Retrieved from http://storage.nestle.com/Interactive_AR_2013/files/assets/common/downloads/page0001.pdf
Nestle b. Financial Statements 2015: Consolidated Financial Statements of the Nestle Group 2015. (2015). Print