Thursday 16 May 2019 8:52 am

With increased scrutiny of the profession, it's time for auditing to be in the public interest

ACCA, Chief executive

Auditing in the UK is undergoing unprecedented scrutiny, and the magnifying scope is focusing on all aspects of the sector.

The myriad reviews, some of which are ongoing, are being conducted by regulators, politicians and government departments, each separately looking at audit’s effectiveness, competition across the sector, and its future in general.

Most notably, the function and remit of its soon-to-be reformed regulator – the Financial Reporting Council – has been under examination, along with a focus on the role of the UK’s largest accountancy firms.

High-profile failures of big high street names have captured the headlines and raised questions of “where were the auditors?”, resulting in some having a lack of confidence in the sector’s effectiveness.

Ahead of its own review, the Business Energy and Industrial Skills select committee published a report on the future of audit, which expressed concerns that “misleading audits” were at the heart of some corporate failures. The report also suggested that the Big Four’s dominance in the auditing of FTSE 350 companies has “failed to deliver audits that are fit for purpose”.

Cooling off

Concerns have also been raised over a conflict of interest in firms selling consultancy services, while their auditing arms are carrying out an audit in the same company.

This has prompted suggestions that a full structural or operational split could be the answer.

In response to these reviews, ACCA has reiterated its long-held belief that there should be a two-year cooling off period, during which non-audit services could not be sold after an audit engagement has ended.

Coming clean

Outside of the reviews and reports, the general public have identified what they see as one answer to improving corporate reporting: good and clean audits.

Despite audit being under growing and intense scrutiny, the public still regard it as part of the solution to what is perceived as unacceptable corporate behaviour.

The purpose of an audit is to ensure that financial statements give a holistic “true and fair view”, ensuring that material fraud is detected, and appropriate levels of professional scepticism are applied.

ACCA recently collaborated with Chartered Accountants Australia and New Zealand to publish research called “Closing the Expectation Gap in Audit”, which explores why it is in the public interest to have an open dialogue between the profession, stakeholders, and the general public. The aim is to explore what kind of audit future the public expects.

This survey of 11,000 members of the public in 11 different countries revealed that 55 per cent believe auditors are responsible for avoiding company failures, while 34 per cent expect auditors to always detect and report any fraud. A staggering 70 per cent believe audit should evolve to prevent company failures.

The UK figures make an equally compelling case over the role of audit in terms of fraud detection, with 41 per cent expecting the auditor to always detect and report any fraud.

It represents a disconnect between what the profession is delivering, and what the public expect.

Mind the gap

The profession has long spoken about the concept of the “expectation gap”, a concept that dates as far back as 1974. And 45 years on, ACCA’s report highlights that there is little evidence that the gap has narrowed.

Despite repeated attempts to mitigate it, fresh discussions around this inevitably return whenever a new corporate failure occurs.

Our research indicates that in order to reduce the expectation gap, it must be assessed in three components: the knowledge gap, the performance gap, and the evolution gap, all of which need to be tackled separately.

Stakes are high

In practice, ACCA believes that improving the public’s knowledge of what an auditor does cannot be achieved by the profession alone.

As the Competition and Markets Authority observed in its review, most people will never read an auditor’s opinion on a company’s accounts.

Everyone with an interest in financial reporting and strong corporate governance has a responsibility to work together to address the public’s legitimate concerns about audit.

Globally, it is clear that the profession must continue to focus on improving audit quality, working proactively with other stakeholders to support better understanding of the auditor’s role.

But, most importantly, all stakeholders connected to the audit process – such as regulators, professional accountancy bodies, investors, governments and the media – have a responsibility to inform the public in a fair, balanced and understandable way about audit regulations and standards. It is in the public interest that they do so.