Originally published in The Accountant, 23 June 2016
Frustrated by the limited gains in audit quality, as reflected in inspection findings, the International Forum of Independent Audit Regulators (IFIAR) has reached agreement with the six largest global network audit firms to reduce negative audit inspection findings by 25 per cent by 2019.
In March, IFIAR released its latest survey from regulators' audit inspection findings globally. IFIAR head and chair Janine van Diggelen, announced that IFIAR "is not yet satisfied that enough has been done by the audit profession to understand and address shortfalls in audit quality."
The negative inspection findings, which involved 43 per cent of audits inspected, do not mean that the related financial statements are necessarily materially misstated. But it does mean there is an increased risk that misstatements may exist that have not been detected by the auditor.
These findings relate only to audits of listed public interest entities by the largest six international network audit firms. These firms are arguably best placed to keep abreast of developments in auditing requirements and their interpretation given their representation on local and international standard setting boards, their ability to leverage off economies of scale and to invest in technical specialists.
While regulators have a critical role to play, more prescriptive requirements for auditors may not be the answer to improving quality and care should be taken to guard against over-reaction.
Increased regulation eventually reaches a tipping point where the auditor's focus shifts to compliance at the expense of the exercise of professional judgement. This can lead to a "tick box" mentality to keep the regulators at bay, but not improve the quality of the audit.
Furthermore, if audit starts to be seen only as a compliance exercise, the audit profession becomes less appealing to high performers, which creates challenges for firms in attracting and retaining the talent needed to conduct quality audits.
Areas at the core of IFIAR's findings include some fundamentals of audit quality, such as firms' quality control systems, particularly engagement quality control reviews and firm-wide audit methodologies, which will clearly need to be addressed as they run to the heart of audit quality.
Prior to the release of the IFIAR survey results, auditors, standard setters, regulators, directors, investors and the accounting bodies put their heads together to identify some possible ways to boost audit quality.
Roundtables were held in a number of locations globally to discuss the issues raised in the International Auditing and Assurance Standards Board (IAASB) Invitation to Comment on Enhancing Audit Quality, which focusses on professional scepticism, quality control and group audits as contributors to audit quality.
The feedback provided by stakeholders will shape not only standard setting for auditors but is planned to be communicated to other groups which influence audit quality, such as universities, regulators, directors, audit committees and professional accounting bodies, so that they may play their part in lifting audit quality.
The IFIAR survey identifies a myriad of specific areas where audits were found to be deficient, but the key to making headway in reaching IFIAR's target lies in the process by which firms and regulators identify root causes, agree on remediation action and monitor effective implementation of those actions.
This strategy is also reflected in the actions suggested in the IAASB's invitation to comment, which has identified making better and more consistent use of external and internal inspection findings as a quality control mechanism.
Implications of inspection findings for other audit engagements, the firm's system of quality control and other firms within their network also need to be considered. The IAASB has acknowledged the impact of human resource policies, including recruitment, retention, training and remuneration and its effect on audit quality.
Any improvements in audit quality achieved by the largest six network firms as a result of IFIAR's initiatives could provide beneficial learnings to mid-tier and smaller practices. To facilitate those improvement there are clearly benefits to be gained from IFIAR, or their member bodies, sharing practical examples of deficiencies identified and remedial actions taken so the broader audit community can benefit.
Alex Malley is chief executive of CPA Australia