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For most Finance Directors auditors are a fact of life. Their presence is required by law, but their relationship with the company, its shareholders and the FD themselves is quite often ambiguous. That means that the role they are to play is a matter on which the FD has to decide.

Since the Caparo decision it is clear that an auditor’s duty is pretty much limited to the company on whose accounts they report. Individual shareholders, and anyone else come to that, don't get a look in. So very particularly this is now a relationship that is between management and the auditor. Unless, of course, you're part of a group, but I'm going to leave that possibility aside for now and assume you're the key decision maker.

Peer 

What do you want this relationship to be? In principle your auditor may be the only person in your whole working world as well versed as you in finance. That suggests they should be your peer; maybe even your sounding board.

But is that what you want from someone who at the end of the day has to say you got things right, or wrong, and who has the power to go to your CEO and say the picture you've painted of the results is, or is not, one they can share? It takes a confident person to believe they can share their honest opinions with someone who could, at least in theory, stand in judgement over them.

If you are that confident person then this is a relationship you need to embrace. The auditor always has to remain an outsider, but the more they know the better they can do two things.

The first is their job of auditor. If they got the management accounts on time each month with commentary attached that lets them understand what is happening. Their confidence in your company, its reporting systems and the ability you have to control it increases. In audit terms confidence is related to reduce risk, fewer questions, less work, more chance of agreement and a lower audit fee. All of those are a significant payback from such a confident relationship.

Over exposed 

And if you want to use the auditor as a source of commercial advice then the more they know the better.

On the other hand, you may feel over exposed as a result. The opportunity to change your mind on the presentation of performance, or the ability to use different accounting policies for management and financial accounts (and there is no reason on earth why you shouldn't if it helps you achieve the performance the organisation desires) are both reasons for reducing this openness and providing instead occasional information as the year progresses, backed up by more robust year end data.

Alternatively you may just also believe that there is no reason to have much of a relationship with this person at all. They're there to do a job, to sign off some information and you want them otherwise out of your hair. Indeed, the fact that they can do the audit may not lead you to think they can be much good as a business adviser. After all, why should they be?

Auditing is at the end of the day an admin based, technically driven exercise and the ability to do those things are aren't necessarily shared with the characteristics of a born entrepreneur, let alone an entrepreneurial accountant. So you may legitimately decide on a relationship that splits functions.

No right and wrong 

The auditor has just that role. Accounting, commercial and maybe tax advice is bought from other people with more appropriate or specialist skills that you need. Even doing this occasionally would actually do no harm in any relationship, just to keep the auditor on their toes, as any supplier should be.

What’s clear is that there's no right and wrong in this. I was an auditor for many years. I've been audited in my capacity as a commercial accountant more times than I care to remember. There was no fixed solution to the role to be adopted. But there is one thing that can always make the relationship dysfunctional and that is ambiguity.

That ambiguity can come from either party in the relationship not defining the boundaries to the role. This though will usually be the FD's fault because you can be sure that the auditor sees you as a profit opportunity, however they like to dress it up.

It's your job therefore, within the limits of the requirement to have an auditor and to deal with them openly and honestly to set the rules for just how that relationship will work. The auditor will do this in writing in a formal engagement letter. You may not need to be quite so formal but ducking the issue of communicating what you want and when you want it will add to your cost and your irritation. That benefits no one.

Deciding upon the role an auditor is to play is a key decision for any FD. Don't duck it.