Will Auditing Undergo Another Reform?

After debates over the future of the Audit and a multitude of solutions which were proposed to resolve the inherent flaws in the profession, regulation may take a radical step which alters the objective of audit itself!

Sir Donald Brydon’s review of the profession in December 2019 concluded by suggesting that auditors had to do better to detect fraud and that this should become part of the wider objective of an audit. This fuelled speculation of tougher stances by regulators if auditor incompetence on lax, poor quality or outright fraudulent financial reporting was evident. Yet, the unprecedented impact of coronavirus has led to more pressing matters taking priority and reforms being put on the back burner.

However, during this period, further scandals have erupted which are hurting the already tarnished reputation of the field with German payment processor Wirecard collapsing after admitting to €1.9 billion in missing cash. Auditors EY face several lawsuits from shareholders for failing to carry out their duties in an efficient and effective manner by obtaining third party confirmation on cash balances which Wirecard claimed to hold. This would have revealed the fraud far earlier and prevented the loss of millions in shareholder wealth, inconvenience to stakeholders including entities who couldn’t accept card payments, thus losing precious business.

But this brings up an age old question, what exactly is the objective of an audit?

Auditors have constantly pointed to what is known as the ‘expectations gap’. This refers to what the public perceives as being the duty of the auditor-the prevention and detection of fraud- and what auditors believe is their role-identify and assess the risks of material misstatement of the financial statements.

Simply put, the existing requirement doesn’t demand auditors to look for fraud but instead execute more of a box-ticking approach which satisfies the requirements as per the auditing standards. This not only inhibits active fraud detection but also permits management to manipulate accounts more easily since protocols and procedures to be conducted by the auditor remain largely unchanged annually.

Perennial issues of intrinsic conflicts of interest between auditing and consulting are beginning to be addressed. The Financial Reporting Council imposed regulations calling on the Big 4 to ringfence their Audit and Consultancy practices come 2024 with an operational plan due to be submitted by each of them by the end of October 2020. The longstanding obstacle of inexperienced graduates handling an overabundance of the technicalities makes audits less effective since their lack professional scepticism makes even the most obvious of errors and fraud to go underneath the radar.

In Cheylesmore Accountants, you have an auditor who puts professionalism and integrity at the forefront of every activity. Our rigorous checks and assessments of internal controls provide comfort to shareholders of the quality of financial statements reported by directors. We strive to change management’s perception of audit as a necessary evil to one of enhancing the confidence placed by users in the accounts which garners several benefits to the business as well. Our differentiated and personalized service stems from our desire to collaborate and work alongside managers to guide rather than criticise them on the standards which should be adopted in preparing and reporting financial information.

Considering an audit of your entity? Why not try Cheylesmore Accountants? We can assure you of the immense difference our Coventry-based Auditors make and the value we add to your business through our superior services and advanced analytics.