Professional model audit – skin in the game

This is where the concept of “skin in the game,” as articulated by Nassim Taleb, takes centre stage. Model auditors must not only deliver high-quality work but also demonstrate their capacity to stand behind it in the long term, sharing in the accountability for their findings.

This accountability requires financial stability and the ability to meet obligations both during the engagement and in the years to come. For regulated clients or high-stakes projects, these qualities are essential.

The role of financial stability in model audits

Financial stability is the backbone of reliable model auditing. Without it, firms can face significant challenges such as delays in delivering work, an inability to meet commitments, or even ceasing operations altogether. For clients, these scenarios can jeopardise project milestones, financing timelines, or even leave them exposed to unaddressed risks.

Consider a scenario where a financially unstable model auditor cannot meet a delivery deadline. This delay could derail a project involving multiple stakeholders, resulting in financial and reputational damage for the client. Alternatively, if a claim arises years later and the model auditor has exhausted their resources or is no longer in business, clients may find themselves bearing risks they believed had been mitigated.

Larger professional service firms, with their established governance structures and resources, are generally better positioned to weather unforeseen challenges and provide consistent support.

Why financial transparency matters

Transparency is foundational to trust. A firm’s ability to demonstrate its financial health gives clients confidence that their model auditor will be there when it matters most. Large professional service firms typically provide this assurance by providing access to audited financial statements, demonstrating their long-standing presence in the market, and maintaining robust governance frameworks.

The model auditor’s approach to professional indemnity (PI) insurance is also an important aspect of how financial transparency intersects with stability. PI insurance typically operates on a “claims made” basis, meaning the coverage at the time of a claim—not when the work was performed—is what matters. This makes long-term financial commitment and the maintenance of insurance policies critical. A lapse in coverage or insufficient limits can leave clients vulnerable, underscoring the importance of selecting a model auditor who is transparent about their ability to manage these obligations.

Takeaway

Selecting a financial model auditor is about more than technical expertise—it’s about choosing a partner with the capacity to share in the risks and responsibilities of your project. The professional model auditor should be transparent and able to demonstrate a track record of ongoing financial stability.

Returning to Taleb’s “skin in the game”, the right model auditor doesn’t just complete the engagement; they are fully invested in the sustainability and quality of their work. By partnering with a firm that is financially stable, transparent, and independent, clients can confidently mitigate risks, ensuring their investments are built on a foundation of accountability and trust.

In our next article, we will explore a final consideration in providing a professional approach to model audit: commitment to ESG principles and demonstrable alignment with stakeholder values.