This is a hugely exciting time to be working in audit. Katie Canell would know that better than anyone. As managing director for audit innovation at Deloitte in the UK, she has an overarching view of how audit is evolving.
“The reform debate has raised a number of challenges, but it's given us a real impetus to drive meaningful change,” she says. “The current situation with a pandemic has accelerated that need for change further – in particular, amplifying business risks around fraud, going concern and viability. There's a real appetite for transformation, perhaps in a way we haven't experienced before.”
Part of that innovation will be enabled and supported by new technology that provides firms with the opportunity to automate some of the more laborious tasks and enable auditors to take a deeper dive into broader data sets to understand what's driving that business in a sustainable way. But it goes way beyond that; it’s an opportunity to revisit the scope, purpose and value of audit and to develop the audit product and the audit profession as a whole to better meet changing stakeholder needs.
Those needs are changing because of the landscape we're in, Canell says. Even without COVID-19, the environment that businesses are operating in has become more complex. Financial information is not the only benchmark of company success anymore; wider impacts, such as societal and environmental credentials, are increasingly important.
“The stakeholders of an audit are not just the shareholders; there is an increasingly broader set of stakeholders who have a vested interest in the health of the business and its impact on the world around it, and those broader stakeholders have more of a voice than they’ve previously had,” Canell explains. “So when you're thinking about the purpose of the profession, it is critical that you think beyond the corporate view towards broader society, customers, employees.”
Auditors have a critical and unique role within the capital market and corporate governance ecosystem. They are providing the independent perspective to drive trust and confidence in the financial statements. Through that remit, they have insight into business controls and key judgements and to provide challenge to management and those charged with governance. That role needs to be clearly communicated, says Canell, and it is critical that all stakeholders can see and feel the value that audit brings through this independent challenge.
One area that Canell and her team are exploring is the role of the auditor in respect of fraud. This is a hot topic at the moment; the IAASB is consulting on the issue, and in the UK, an ISA 240 consultation is also ongoing. Stories such as the Wirecard scandal are keeping fraud in the news. There is a clear focus on how companies and auditors respond to the risk of fraud and how this is made visible to stakeholders.
“Brydon talked about the need to inform, as well as assure,” says Canell. “As we think about where the profession’s going, we have to keep in mind the company and auditor responsibility to provide meaningful information in a way which is really understandable to the users of the accounts and not constrained by jargon.”
Revisiting the scope of audit is an important element when it comes to delivering the purpose, says Canell. The Brydon Review offered recommendations on audit’s scope, taking it beyond historical financial information and into more forward-looking and non-financial areas, such as ESG-related disclosures. In short, addressing the changing business risk landscape and stakeholder needs.
“If the purpose of audit is to drive confidence for stakeholders, we need to ensure reporting addresses this need for a broader information set, which gives insight into the overarching health of the business. The focus is shifting onto the sustainability, flexibility and longevity of the business model underpinned by its control environment.”
The auditor mindset and demonstration of professional scepticism is another critical area. Professional scepticism is not a new topic and is a core part of the existing training for auditors but there is a focus on how the auditor’s skillset and challenge mindset can be enhanced further. It’s something that Deloitte is reviewing closely; the firm spends a lot of time focused on professional scepticism in the training it offers its people, both in-house and from outside providers such as ICAEW. Building on these skillsets involves equipping auditors to have a strong understanding of common psychological biases – both at the company they’re auditing, as well as with the audit team itself.
“The auditor skillset needs to be strengthened in this area: we need to equip auditors to really understand the risk of bias within our own judgments as well as the risk of bias in the boardroom. Sometimes that might be very clear, such as a single dominating individual on the board. But you might have other instances where, over a period of years, a historical judgment hasn't been challenged or there is a danger of confirmation bias or a general lack of diversity and challenge in making decisions. Poor controls around judgements over a period of time could lead to more fraudulent activity.”
Audit needs to evolve to adapt to the modern business world and the changing needs of its stakeholders. To do this, all parts of the business community need to work together – policymakers, investors, company directors and auditors. You need diversity of thought if you’re going to take a truly holistic look at audit and how it can adapt to modern business and governance needs. That diversity of thought needs to exist within audit firms as well as across the business community.
“From our newest recruits at associate level, right the way up to partnership, we have a huge opportunity to draw on different perspectives and challenge different mindsets,” says Canell. “Diversity of thought is so important; those new to the profession bring a valuable fresh perspective and insight.”
The Audit Manifesto refers to a safe experimentation phase when designing audit’s future. That's really important, says Canell. “Acting in the public interest, we have to be proactive. We have to be voluntarily pushing to define meaningful change to the profession and the product. We must take steps to address the demands of stakeholders and broader societal needs. If we are going to act in the public interest, we have to take action now. We might not always have the perfect answer, but we can start to drive positive change as a shift towards the future audit product. That needs to be done to some extent through experimentation.”
That experimentation needs to be focused, she explains, but the profession should not be afraid to try out new things, to deliver on its purpose in the public interest. “We need to create a safe space for both corporates and the audit profession to encourage innovation in the public interest. That should support responsible business and strengthen capital markets. We need to do this with pace and use these learnings as part of the move towards better regulation.
“The profession has a responsibility to act. We've got to use this as an opportunity to drive meaningful change. Change is hard for everyone; it's hard to be agile, especially when you're working against a landscape that is continually shifting as well. But that's not an excuse to sit back and wait.”
ICAEW Know-How from the Audit and Assurance Faculty
This guidance is created by the Audit and Assurance Faculty – recognised internationally as a leading authority and source of expertise and know-how on audit and assurance matters. Join the Faculty to connect with like-minded professionals and gain access to essential guidance and technical advice.