Inquiry into audit - international perspectives
The UK’s current inquiry into the future of audit is part of a larger debate internationally on the future of audit. Across the globe, the profession and regulators are debating all aspects of audit. We highlight a few of these debates, as well as two key international reviews.
Following up on their 2014 article, Making Financial Reporting Better: Strengthening the Financial Reporting Supply Chain, the International Federation of Accountants’ (IFAC) Professional Accountants in Business (PAIB) discussed the risk of considering audit in isolation from the wider financial reporting ecosystem. In particular, the importance of audit committees was highlighted; this ties into the UK’s reforms, with Sir John Kingman calling for the new UK audit regulator to strengthen review of audit committees.
Four committee members from Canada, Malaysia, Hong Kong and the United States, shared their experiences on what makes audit committees effective. This includes ensuring audit committees have an independent chair and are composed of members with strong financial literacy and business knowledge. IFAC intends to explore ways to strengthen audit committee practices in the future.
Stephen Walker FCA, President of Chartered Accountants Australia and New Zealand and executive director of Audit New Zealand, recently met with Sir Donald Brydon to share their views on the UK audit review. In this opinion piece, he sets out his views on how to maintain public trust in audit quality.
The future of audit, the Chartered Professional Accountants of Canada (CPA Canada) state, will need to take into account not only the causes of the corporate failures, but also apply new technologies. CPA Canada will be exploring this further in their Foresight project.
These discussions have also resulted in two key reviews in the Netherlands and Australia which have similarities to the ongoing UK audit reform reviews by the Competition and Markets Authority, Sir John Kingman and Sir Donald Brydon.
Dutch review of the audit markets
The Dutch Authority for the Financial Markets (AFM) conducted a study on the audit sector, focusing on vulnerabilities, audit quality, and supply and demand issues. They published a report in November 2018 which explores possible structural changes in the audit market. This comes in the context of AFM collectively fining Big 4 firms €6.1m due to quality shortcomings in 2016.
The Dutch government has set up an independent committee, which will review the audit sector and provide recommendations for improvements, including alternative structural models. The focus will be on improving audit quality. The committee is expected to publish preliminary analysis and findings in the second half of 2019, with final recommendations at the end of 2019.
Australian review of auditor disciplinary processes
A joint Parliamentary committee on Corporations and Financial Services published a report in February 2019, questioning the long-standing issues of audit quality findings in Australia. In the committee’s view, the structure of the audit market and conflicts of interest merit ‘serious review’. In particular, they noted the market dominance and non-audit activities conducted by major firms. While no review has yet been set-up as a result of this report, this could be reopened in the future.
Following this, in March 2019, the Australian Financial Reporting Council published their review of auditor disciplinary processes. Their recommendations for the Australian Securities and Investments Commission (ASIC) included enhancing enforcement and disciplinary processes, including publishing the names of firms on audit inspection reports and powers to force auditors to redo poor quality audits.