Because numbers tell a story

Once upon a time, there was a little boy called Thomas ...

Don’t worry, dear readers. I won’t bore you with tales of my childhood, though that is the typical way to begin a story. The story I want to tell you however is anything but typical. That is why it starts the way it does.

Once upon a time, there was a Swiss family business.

In this business, different interests came together: from the owner family, members of the family, both older and younger generations, relatives, employees and – increasingly – from society as a whole.

The family business I’m talking about could be a third-generation carpentry firm. But it’s not, because that would be my parents’ business, which I didn’t take over myself. As I said, that’s another story.

The family business I’m talking about produces meat products – terrines, pâtés, sausages, smoked meats, ready meals. It’s based right in the middle of nowhere, half an hour away from the nearest small town by bus. Since the catering industry came back to life again after the disruption caused by the pandemic, B2B business is heading back towards pre-pandemic levels. Direct sales via their butcher’s shop in the village as well as a bus ride away are flourishing as much as ever.

The traditional business is currently being run by the fourth generation. The owner – the boss, as everyone in the business affectionately and respectfully calls him – has just reached retirement age. The company is in his firm hands as CEO and Chairman of the Board of Directors. The business family includes five children: two girls and three boys. Two of the sons are from the wife’s first marriage. The two daughters are both involved in the business: one as production manager, the other as sales manager.

The eldest daughter and current production manager is committed to sustainability, and wants to put the entire energy supply for production on a sustainable footing. In other words, she wants to invest in facilities costing millions of francs. The second oldest, who works as a sales manager, wants to align the company closer to the needs of the customers and introduce a customer relationship management system. She estimates the cost of this at about half a million Swiss francs.

Meanwhile, the father has other problems. He tries to keep his B2B customers happy, but he is having to compete against cheap meat imports. Furthermore, his two stepsons don’t want anything to do with the company and want to be paid off. And finally, his own son works in the controlling department of a food company and is thinking about starting in the family business as well.

Let’s take a short breather.

You are right to ask what all this has to do with assurance or with me being an auditor. More than you might think.

Let’s assume that PwC is the company which carries out the audits for this company. And let’s assume that I am the account manager responsible for them. Maybe I have become that, because I am a typical NextGen. Perhaps that’s because the boss, a retired colonel, thinks highly of people with a military background – I, for example, was an officer in the Swiss Air Force. Maybe I got the nod because as a trained optician I’m good at listening to my customers. Or maybe it was all just a coincidence.

If we accept all this, now I can move on with the story.

Because I have been with this company for a long time, I know how their business model has changed over the years. Things have developed from small-scale production with manual operations to automated large-scale production with 340 employees spread across all areas of the group. I know the strategic challenges, such as growth financing, governance, risk management, cyber security or upcoming investments, as well as the operational details such as food safety requirements, supply shortages, VAT and customs issues. And of course I know the numbers.

The family business doesn’t have enough capacity of its own to do any more than correct business accounting and the annual financial statement. That is why I meet on site at least four times a year with the boss, his two sons and the external CFO, who together form the company’s management team.

As auditors, my team and I deliver a physical product once a year – the audit report. This is a few pages long and meets the usual reporting standards. It’s only really the logo and my signature which makes it any different from an audit report done by any other auditing company.

This report is certainly not the reason why my client wants to see me so often. It could be that he is impressed by the high quality of our audit work. Maybe he likes me personally. He might know that I come from a family business that’s been passed down the generations. He must realise that I have no financial interest in his business. Presumably he sees me as a sparring partner who can take an unbiased look at his business from the outside, and if necessary will bring in the right experts when it comes to issues which neither of us can deal with in-house. Ultimately, I’m quite sure that he trusts me.

Even now, I remember the day when the boss wanted to speak to me out of the blue. He suggested that we have lunch in a restaurant in Zurich. There, he posed a question which is relevant to a lot of family businesses. How does the financial situation look now that the youngest son now wants to join him in the business? A senior position would have to be created or the CFO would have to be released, which would have an impact on overheads. The ownership structure would also have to be reorganised, which would have consequences for the capital structure.

The boss would prefer to draw the issue out over a number of years in case the youngest son changes his plans or is simply not suitable for the job. At the same time, he saw an opportunity to get his two operationally active subsidiaries more closely integrated within the company. We talk about alternatives, opportunities, risks, advantages and disadvantages. I also promise to put him in touch with our expert team for business development and succession planning.

We go our separate ways, and I know that my client has just told me the story that the figures will tell me in a couple of years, because numbers always tell a story. Just like me here in Disclose.

Most auditors read these figures as they were taught to: as accounting tables, annual, half-yearly or quarterly financial statements. I read them like a book. Because as an auditor, I don’t just have to make sure that the figures are correct. I also have to make sure that the story is told correctly.

Is that a frown I can see there? There’s nothing to be concerned about.

I am not talking about cooking the books here. I am talking about making sure that the information which comes out of a financial accounting system – the figures – give a true and fair view, are communicated to the relevant stakeholders and are properly understood by them.

In my case, the story makes happy reading. The process of integrating the youngest son into the family business is begun and the ownership structure is reorganised. Though having a coherent plan becomes all the more important when things don’t go so well. It is not always just the turnover or income which is affected. It’s often also about assets that lose value, investments that will only bear fruit in a few years and about goodwill that shrinks.

The numbers from my mandate in the meat industry will tell me a lot more stories. Stories about investing in new production facilities that reduce the company’s environmental footprint, stories about the real estate passing to the stepdaughters as an advance on their inheritance and stories about the new CRM system, which involves a number of digitalisation measures. In all these stories, I will have to analyse the interests of family and business in order to understand and interpret them correctly.

And then they all lived happily ever after.

This is how the story could end. This story doesn’t need an ending though, because it isn’t real. Neither the family business from the meat industry nor the mandate actually exists in my portfolio in real life.

What absolutely is real, however, is my function as a storyteller in assurance. As such, it is my responsibility to recognise the context of the numbers, to show perspectives and to tell the story in a way which reflects reality so that it has a happy ending.

That’s assurance!