Is audit unwell?
Is audit unwell or should auditors be explaining more clearly the work carried out so that lessons over failure can be learnt, asks Jamie Tomlin.
With increasing fines for errant auditors and the recent failure of Carillion, the public must be asking whether audit has a value, or even a future. Of course, like many reading this article, I have a self-interest in this, but I believe the answer is yes.
In defence of audit, I question what the quality of reporting and investor confidence would be if audit did not exist. Does the auditor have the equivalent of an “invisible hand” acting on financial reporting practices and policies and so restraining an entity even before the auditor has stepped through the front door?
The limitations of an audit must be understood. As an auditor, I have always struggled with the knowledge imbalance. Despite understanding the entity, despite understanding the industry and despite applying scepticism, I still do not have the same knowledge as the client.
I am not auditing from a position of strength. Disclosure of estimates and judgments, together with key audit matters in audit reports, can help to draw out the softer areas of the accounts and the audit, but does this go far enough to convey the challenges of the audit, and in a manner that a user understands?
See also: Too big to manage
Can the profession learn from failures? Would a more open understanding of audits leading up to a failure help the profession to learn, to understand what the causes of failure are and what, if anything, the auditor could do different?
Root cause analysis is very popular, and has merit, but we tend to be a very protective and inward-looking profession. Quite possibly the regulatory and legal pressures steer us towards this, but would it be beneficial to have greater disclosure about the work performed?
What can entities learn from the audit? Could auditors do anything different to help an entity recognise when parts of its reporting may be more susceptible to variability? This will not stop failure, but it could help an entity to recognise that if the accounting is a challenge, the underlying transaction must also be at risk – and this does have commercial implications.
But despite the problems, I do believe that if audit did not exist, something very similar would be created, even demanded!
Jamie Tomlin is chair of the LSCA Technical Committee.
Liked this? Read these:
- What’s changing in company reporting?
- Borrowers potentially impacted by IFRS 9
- FRC sets out corporate reporting challenges
Go to London Accountant for more features, news and opinion.
Follow us on Twitter @ICAEW_London and join us on LinkedIn: LSCA and Croydon.
Subscribe to ‘regional updates’ to receive more articles.