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It’s time to deal with the ‘elephant in the audit room’

Author: ICAEW Insights

Published: 09 Sep 2021

ICAEW Past President Martyn E Jones says there is strong empirical evidence from inspection reports that the vast majority of audit areas requiring improvement relate to problems arising during the closedown of the audit, when the risk of insufficient time to carry out audit work is at its greatest.

Jones considers it astonishing that in three recent years, almost half of the FRC findings – where improvement or significant improvements are required – relate to just three areas (namely: impairment of goodwill and intangibles, provisions including loan loss provisions, and ‘revenue and contracts’).

The regulatory response, Jones argues, seems to be to blame the auditors for not delaying the audit sign off, or for not standing up to management when tough decisions need to be taken. He agrees that auditors should take a tough stance against directors and management and that there is also a need to more proactively utilise datasets that may provide contradictory audit evidence.

In a more extensive article for ICAEW, Jones also explains that more must be done to improve auditor communication with directors and management much earlier, at the planning stage in relation to the closedown of financial and business reporting, particularly in relation to what is required for audit closedown purposes. 

Jones says that lessons can be learned from the legal profession by taking detailed minutes of all external meetings, including during the audit closedown, to rebut more easily allegations of a lack of challenge and of key judgments being taken on the grounds of ‘culture fit’. 

Significantly, Jones also says that there are other ‘actors’ who contribute to the insufficiency of time, the inadequacy of audit evidence and other problems that arise around the closedown of audits, including:

  • Management of companies not performing timely closedown procedures
  • Directors and audit committees not focusing earlier and in enough detail on the specific areas that cause difficulty and delay
  • Analysts, who put huge pressure on directors and management to meet reporting deadlines, and who can trash a company’s shares at any hint of delay
  • Policymakers, for not doing enough to assess the sheer magnitude and difficulty of proposed changes and their effect on the time needed for financial reporting and audit closedown when so much must be done simultaneously.

So where does this take us? Jones thinks that the good news is that waking up to and responding to the ‘elephant in the audit room’ can be dealt with using targeted measures that do not require new legislation or a mountain of additional auditing standards or checklists including:

  • Updating and improving the FRC’s 2014 Guidance on ‘Risk Management, Internal Control and Business and Financial Reporting’, which does not fully address closedown issues and the need to avoid over-optimistic judgments and estimates 
  • Making specific, significant improvements to the illustrative representation letter in International Standard on Auditing (UK) 580, which Jones describes as ‘not fit for purpose’, in need of urgent updating, and unhelpful in engendering sufficient debate between directors and auditors during the closedown process
  • Calling on the regulator to review reporting deadlines in different sectors and for companies experiencing difficulties as revealed by the Corporate Reporting Review.

Jones is optimistic that, with an enlightened regulator such as ARGA, and better engagement during the planning and closedown process between auditors, management, directors and analysts, much can be done to improve UK audit quality and restore trust in audit and corporate governance.

A longer version of this article can be viewed here.

Martyn E Jones is Chair of the Advisory Board to the Department of Economics and Finance at Brunel University London. He was formerly an ICAEW President and Chair of its Board. The views expressed above are his own.

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