The fallout of reforms to the audit profession brought about by CLERP 9 have been considerable. But opinion differs as to their overall effectiveness
Unforeseen outcomes at a cost
In the red corner: Dianne Azoor Hughes
The primary objective of the legislative reform levied on auditors was to bring about behavioural change in the audit profession. The legislative auditing standards, rigorous quality control standards and the ASIC audit inspection programs are contributing to improving the general standard of audit quality across the profession. However, there are additional unforeseen outcomes, with significant costs that are just starting to be realised.
In 2008 a key characteristic of audit quality lies in documentation. Checklists have become a way of life for an auditor in charge of fieldwork, as the completion of mandatory audit procedures is likely to be the first area of interest for a reviewer. Anecdotal evidence reveals that intelligent, inquisitive professionals are not finding satisfaction in the form filling that has become an essential part of audit evidence. There is also significant personal risk in the event of an inadvertent omission.
As we reflect on the first year of legislative auditing standards and the third year of the ASIC inspection programs, there are several salient questions to be asked.
As audit quality becomes defined by file completion and documentation, rather than a primary focus on the opinion provided, how long will it be before the profession's newest audit partners also consider form and due process first, before skill development and intuitive evaluation?
As a high-quality audit becomes focused on completion of all black letter mandatory procedures, is there a risk that quality will be represented by standard of documentation rather than quality of content?
As auditor, duty of care is demonstrated by completion of a due process. How long will it be before the first corporate failure highlights the glaring gaps in an auditor's business acumen that cannot be plugged by due process?
As competence becomes a reflection of a fully documented due process, how long will it be before professional judgement becomes a wishful hallucination of a time gone by?
Having experienced three ASIC inspections it's pleasing to note that the regulator, like the firms, is also learning how to better manage the audit inspections. However, while communication and transparency in the inspection process are good, the time commitment remains enormous.
Typically, in the inspection of one firm within a national association, ASIC may have three to five staff actually on site for two weeks. But before that visit, documents need to be prepared and delivered over a period of approximately one month. For the substantial part of the on-site visit and during the period for document delivery, a firm will have partners and senior staff involved in retrieving and preparing documents for submission to ASIC in electronic format.
ASIC's second report to the FRC issued in August 2006 noted that: 'Collectively the Big Four Firms audit 53 per cent of the listed entities in Australia, and approximately 88 per cent by composition and 96 per cent by market capitalisation of the 300 largest entities listed on the ASX ('S&P / ASX 300'). In contrast, the mid-tier firms in-spected audit approximately 2 per cent by composition and 0.2 per cent by market capitalisation of the S&P / ASX 300.'
Given the relative market risks of audit failures, it is curious that ASIC seems to spend a disproportionate amount of time in non-Big 4 firms.
The risk-based audit standards became operative for financial periods commencing on or after 15 December 2004 (effectively financial years ended on or after 31 December 2005), and changes to the quality control standards for firms were introduced from 1 January 2006. These changes required audit methodologies to be revised, audit manuals to be updated and training courses to be compiled and delivered. In conjunction with these significant changes to the audit environment the ASIC inspections of audit quality in firms commenced in August 2005.
Similarly, continuing ASIC inspections coincided with the introduction of legislative auditing standards. Not surprisingly this timing resulted in ASIC preempting firms' actions. Generally, ASIC recommendations for change were provided at the same time when firms were already actively involved in those preparations. Further, ASIC comments on readiness for implementing change need to be read with the understanding that the ASIC inspection was the primary cause for a diversion of the resources that would otherwise have been completing the recommendations it had put forward.
Given the stage of progress, going back is not an option. However, the challenge will be to retain (and enhance) the professional development of auditing skills despite the constraints within which we must now operate.
These changes have altered the audit landscape
In the blue corner: Jennifer O'Donnell
Globally, the auditing profession has undergone significant change over the past five years. After a number of high-profile corporate collapses, new regulations and enhanced auditor oversight functions were introduced in a number of jurisdictions, including Australia. These were aimed at protecting the interests of investors, restor-ing confidence in capital markets and maintaining standards in the auditing profession.
Auditors in Australia are now required to comply with new independence requirements in the Corporations Act and a new regime of auditing and professional and ethical standards that are legally enforceable.
All auditors, and not only those conducting audits of entities listed on the ASX, need to have appropriate systems and processes in place to enable them to conduct independent and high-quality audits.
The profession largely acknowledges that the changes are now an embedded component of the system of corporate governance that assists to maintain the relevance and weight given to an audit opinion. These changes have altered the audit landscape, and auditors must ensure they are equipped to meet the new requirements.
ASIC's audit regulation team (ART) plays an important role in influencing the standards of auditing in the accounting profession through its inspection program. By working with the profession ASIC helps raise the standard of audit quality and auditor independence. Our inspection program concentrates on the audit firms' independence systems and assesses their conduct of audits for compliance with auditing standards.
Now in its fourth year of inspections, ART is entering a new phase of its program. To date the team has focused on inspecting significant audit firms in Australia, as these firms audit 85 per cent of entities listed on the ASX. Inspections involve reviewing the firms' systems of quality control and the conduct of audit engagements to assess compliance with the independence and quality requirements of the Act.
Follow-up inspections will be more targeted on the review of individual audit engagement files to assess how firms are at applying their audit methodologies in practice. At the end of the day, auditors know that the market needs them to be vigilant and provide shareholders with an independent assessment of management's judgements so that the financial statements report a true and fair view. The application of the methodology is critical to achieving this objective. Auditors have a unique insight into an entity's operations. They need to avoid a 'tick the box' mentalit and design audit procedures that address the risks identified and add value by providing an independent perspective.
ASIC is also engaging more widely with the broader auditing profession than in the past. We have already met with a number of key audit partners and the technical directors of a dozen auditing firms, and discussed opportuni-ties to work more closely together.
In addition to our working relationship with the professional bodies, this will see a closer working relationship developing in the coming year that should also help the profession as a whole to have a better understanding of how we go about our work.
Raising standards is something every member of ART is passionate about. The work provides an opportunity to contribute to and influence the future of the auditing profession. The ASIC team is responsible for developing strategies to monitor and improve compliance with the new auditor oversight requirements in Australia. Following the recent passing of new legislation, ASIC also has the opportunity to work jointly with other international audit oversight bodies, helping to shape global regulation. We also want to work more closely with the broader profession to achieve our common goals.
Who are the staff members who undertake audit inspections for ASIC? Most audit inspectors at ASIC are professionally qualified, experienced audit professionals from major accounting firms and national or state auditor-general offices. The team members are located in all major capital cities in Australia.
The former partners, audit directors and senior managers who have joined ASIC have found it a great environment in which to share their knowledge with like-minded professionals, and give something back to their profession. Others enjoy the opportunity to travel and the challenge of influencing behaviour in a profession that has seen significant change in recent years. By working more closely with auditors we believe we are uniquely placed to understand how firms operate, to integrate international perspectives, and to help make a real and positive difference to the profession.
Jennifer O'Donnell is executive director, compliance ASIC.
