The audit profession at a crossroads. As the role of the auditor comes increasingly under the spotlight following recent global financial turbulence, ICAEW believes that it is vital that the accountancy profession re-examines the role of audit and assurance and comes up with constructive, practical ways which both can improve and continue to benefit businesses, the economy and society in the 21st century.
ICAEW's engagement on these issues
European Parliament briefings
View ICAEW's European Parliament briefings on
Can audit committees do more? Webcast
Investigating how audit committees engage with auditors on audit planning and performance, Professor Vivien Beattie, Professor Stella Fearnley and Tony Hines delivered their conclusions in the annual PD Leake lecture on 21 June 2011. They concluded that whilst the audit committee is engaging effectively with auditors they do not have the time to do more. Finance Director Graham Roberts gave a practitioner response.
The audit profession at a crossroads? webcast and vodcast
View the webcast and vodcast summary of a member outreach event held on 16 May 2011 giving the faculty a mandate for a progressive agenda.
The audit profession at a crossroads? webcast
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Running time: 133 minutes 26 seconds
The audit profession at a crossroads? vodcast
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Running time: 5 minutes 25 seconds
Developments need to respond to the demands of stakeholders, policymakers and regulators and should be evidence based.
- Key themes being set by governments and regulators
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Key themes being set by governments and regulators are as follows (with quotes from EC Internal Markets Commissioner Michel Barnier):
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- Clarifying the role of auditors - ‘Should the auditor limit his judgment solely to ‘the applicable accounting rules’ as is now the case, or should he go beyond that and give his opinion on the overall state of health of the company?’
- Audits have a very specific purpose within the statutory framework which is frequently misunderstood, creating an expectation gap. Changes in this purpose will therefore need to be specific and clearly communicated. The value of comfort provided with the costs of providing it will need to be carefully considered to ensure that audit quality and market confidence are enhanced. The audit profession is well placed to innovate in non-statutory areas.
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- Strengthening the independence of auditors - ‘The crisis has tarnished this image by highlighting certain conflicts of interest. Today, independence must be visible, obvious. You can't at the same time cumulate the functions of audit, internal audit and strategic consulting.’
- Transparency and disclosure of these arrangements, which need to be clear and open to challenge, will help address the perceived conflicts of interest. We are always open to ideas to improve the independence of auditors but do not agree with the assumption that audit can only be performed objectively if there is no business or other relationship. Its adds to the value of an audit and costs can be minimised if the auditor’s knowledge can be continually improved by enabling multi-disciplinary skills to be applied by practice always, of course, with a consideration of the threats and safeguards of such engagements.
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- Promoting an evolution in the structure of the audit market - ‘The auditing market is hyper-concentrated. How can we encourage the emergence of new actors capable of being competitive? Some possibilities: putting in place ceilings to the total market share of the larger audit firms for listed companies; the idea of joint auditing where the audit could be done by two different audit firms, one of which at least is not part of the Big Four; and there is also the option of a ‘European passport’.
- We agree we need to address the risks inherent in the current market structure, but any intervention to address this concern should be well researched to protect audit quality, which is the priority, and avoid unintended consequences. Measures to break up the largest firms are not justified by the evidence from regulators of the audit quality they achieve.
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- Facilitating SME growth - ‘What is justified for a large audit firm is not necessarily justified for small and medium-sized audit firms.’ In raising the audit exemption threshold in the UK, Vince Cable, the Business Secretary said that in reducing the burden on SMEs to produce accounts that 'small firms will be able to concentrate on taking on more people instead of paperwork'. See press release.
- There is a need for a common framework for alternatives to audit to allow EU member states to address audit exemption according to their national environment. Whilst raising the audit threshold for SMEs will reduce their costs of complying with regulation, it cannot be at the expense of the quality of SME financial information.
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- Reinforcing international cooperation- 'Before giving to privately set standards the force of law, public authorities have the right to ask questions on the governance of the entity creating the rules. But what is clear is that whatever the solution, it will have to be global. We can only move forward if there is more cooperation between regulators, and if our international partners fully engage in applying these rules.'
- We support the adoption of ISAs globally which we believe have been developed in the public interest under a rigorous and transparent process. We note that there are no other internationally developed standards available currently.
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- Scepticism- The 2009/10 AIU inspection round found too many audits requiring significant improvement, with firms not exhibiting sufficient professional scepticism in relation to key audit judgments.
- Being sceptical is a fundamental requirement of any ISA audit (ISA 200 paragraph 15) and therefore a mindset of professional scepticism should pervade all aspects of ISA audits. Auditors should be held to account for this. Whether this should be described as a ‘presumptive doubt approach’ (as in paragraph 5 of the APB paper) is questionable. We do not consider that there is any evidence to support the assertion that there is currently a general lack of scepticism being displayed by auditors.
The constructive views and ideas of practitioners are sought on these areas. A practical auditing discussion group meeting will be held on 16 May 2011 and people interested in discussing their ideas should contact henry.irving@icaew.com.
In addition the evolving role of the audit committee, together with learning the financial reporting and financial services industry regulation lessons from the financial crisis of 2007/8 are other areas which the profession is constructively addressing.
See links to IFRS consultations and the report Audit of banks: lessons from the crisis (PDF 1MB/33 pages).
It is a notable success of ICAEW’s practical approach that, following the publication of Audit of banks: lessons from the crisis that the Financial Services Authority and Bank of England, working with ICAEW, have issued a draft Code of Practice to encourage better interaction between supervisors and auditors.
- ICAEW’s engagement on these issues
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View the EC Green Paper on Audit Policy: Lessons from the crisis and ICAEW’s response (PDF 497KB/44 pages) together with the APB Auditor scepticism: raising the bar consultation and ICAEW response.
View the House of Lords Economic Affairs Committee enquiry into auditors: Market concentration and their role with ICAEW evidence and press release.
- Practical steps to improve auditing and reporting
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The Audit and Assurance Faculty produces guidance for its members aimed at supporting them in continually improving quality. Examples include Quality control in the audit environment, Right first time for clarified ISAs, auditing related parties and Group audits.
ICAEW has promoted the needs of SMEs through its dialogue about alternatives to audit, assurance services and the re:Assurance initiative. Some current initiatives are in the section below on Development of the ICAEW Assurance Service and new assurance projects, including ICAEW’s Assurance Service is aimed at the needs of SMEs.
Evolution in the structure of the audit market - In the past the Audit Quality Forum (AQF) has had a role in policymaking, for example in the development of the Companies Act 2006 and the introduction of ISAs in the UK. The shareholder involvement and fundamentals programmes used working parties to pool experience to inform policymaking. It is planned to revisit this approach to inform the EC, national governments and regulators by sharing practical experience and making this public.
- Independent research
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Research funded by ICAEW trusts includes:
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Independence – The Centre for Business Performance briefing on the impact of changes to the NAS regime on finance directors etc shows that regulatory changes post-Enron have substantially reduced the fees for NAS, but an unintended consequence is that the financial reporting process is less efficient and effective with auditors unable to advise on financial reporting matters and have less understanding of their clients activities due to their more restricted engagement on other aspects of the business.
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Value of audit - research in this area resulted in 2001 in Professors Vivien Beattie and Stella Fearnley together with Richard Brandt publishing their award-winning research ‘Behind closed doors: What company audit is really about’. A qualitative investigation into the UK audit process between FDs and auditors, it showed that in the late 1990’s the system worked reasonably well. Beattie, Fearnley and Tony Hines undertook further research in 2007/8 investigating the impact of post-Enron regulatory changes on the way which finance directors, audit committees and audit engagement partners interact with one another. In particular they focused on how behaviors had changed since the role of the audit committee had been strengthened. The book of the latest research has been published by Wiley and is titled ‘Reaching key financial reporting decisions: how UK directors and auditors interact’.
There is also some German stakeholder research into some of the proposals in the EC Green Paper.
- Development of the ICAEW Assurance Service and new assurance projects
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Assurance on annual reports
The Assurance Panel (TAP, an Audit and Assurance Faculty sub-committee) proposes to develop material/brochure to provide a framework on selective assurance reporting on the front half of annual reports. The format may be similar to Sustainability assurance: Your choice.
ICAEW has expressed its view in its publications and representations that assurance reporting in relation to the front half of annual report is best dealt with outside the scope of statutory audit and tailored for the entity and the need of users.
The proposed guide is intended to:
- Instigate a discussion between those who would benefit from strengthening the credibility of selective aspects of non-financial information in the front-end of annual reports and external accountants.
- To help inform management/audit committees on the difference between audit and assurance.
Plans to develop and promote ICAEW’s Assurance Service once international standards are finalised.
The IAASB is currently exposing a draft standard on reviews. The IAASB will consider the response in December with a view to finalising it in 2012. As seen in the EC Green Paper on audit, there is interest among Europe where audit exemption is introduced in a number of countries.
Some ICAEW members have been offering the ICAEW Assurance Service to clients since 2006. ICAEW has relevant guidance in issue and have the arrangement to support the service provision including: technical and practical guidance; the technical enquiry service; roadshows; and practice assurance. Its technical and practical guidance is referred to internationally and appears to have inspired others to develop similar materials. With this background, ICAEW has been involved in the IAASB project on reviews as a correspondent member.
TAP intends to:
- Align AAF 03/06 and the related practical material in the light of the IAASB standard on reviews. In doing this the views of stakeholders will be considered, including the regulator.
- Consider the application and market for the guidance and promote the use of ICAEW Assurance Service/reviews in the UK and beyond.