ACCA and Grant Thornton discuss the main challenges auditing faces in a series of roundtables.
ACCA and Grant Thornton have hosted a series of roundtables in South Africa, China, the EU, Singapore, the UAE, the UK and Ukraine, discussing the future of audit. These discussions offered valuable insights into what issues the audit profession is currently facing and how it may have to evolve to remain relevant.
According to the reports of these roundtable discussions, the idea of audit as a single, universal service that is the same for all types of entities anywhere in the world is under unprecedented strain.
“The complexity and global interconnectedness of today’s business environments have resulted in growing demand for assurance that information is disclosed fairly and accurately, but as quality auditing standards have enhanced confidence in larger companies they have also introduced additional hurdles for smaller audit entities and for countries where the audit profession is still developing. One pace of development will not suit them all,” the report states.
One of the topics that came up in the discussions was the big mismatch between what the market wants, what the investor wants, what the companies who want to list want and what the regulator allows. One approach would be to put the audit user first; as one participant from South Africa commented: “Surely, [auditors] should be listening to them and giving them the product that they want?”
For this to happen, however, the profession must adapt and understand who the users are, what information they use and what they use it for. “Users are looking to the audit to evolve further to allow auditors to provide more valuable insights about a wider range of measures.”
Two main messages emerged from the roundtable discussions: there is no one global answer or global agreement on what the future will look like, and countries with a longer history of historical financial statement audit are more inclined to think about wider assurance on non-financial data/information or forward-looking information.
Grant Thornton International director of public policy Nick Jeffrey said:
“Whatever the service – historical financial statement audit or assurance – there was agreement that it needs to meet user needs. However, it is clear that user needs are different in different countries.”
Some recommendations were set out for policymakers and standard setters. There is no single answer but there is strong encouragement for policymakers to allow room for innovation to develop. Open discussions with all stakeholders are needed in order to understand their needs.
One South African participant proposed “different audit reports for different purposes rather than one report which is for every stakeholder”. Although another investor from South Africa said that new regulations on auditor rotation could hamper the efforts of auditors to give really valuable insights: “They need to be close to management, they need to be close to the business, and it takes a number of years.”
According to ACCA South Africa head Pat Semenya, the much publicised corporate failures together with IRBA’s 2019 public inspections report has brought a spotlight on the quality of the external report in South Africa. Studies indicate that a significant majority of the listed firms are audited by the big four audit firms, an indication of the lack of diversity from a firm and opinion perspective.
“Declining economic performance made worse by the Covid-19 pandemic will mean fewer entities that can afford the services of auditors,” she says. “Increased risk of litigation makes auditing a less attractive profession. Increased automation of enterprise management systems and the automation of their auditing.”
Four other main issues were discussed, each with their own sets of challenges and opportunities:
Understanding the business of the auditee, its corporate defense and value preservation is a cornerstone of a robust audit.
“Standards and rules can be good guides but the real journey cannot be predicted – you have to find out yourselves,” says International Auditing and Assurance Standards Board (IAASB) chairman Arnold Schilder. “This understanding of the business includes how the auditee has organized its value preservation, and its corporate defense around that.”
Professional skepticism, as a state of mind and attitude, should govern the performance of auditors.
“Professional skepticism is a fundamental concept and core to a high-quality audit,” Arnold said.
According to Arnold, professional skepticism is about the appropriate mindset of the auditor. It is relevant throughout the entire audit.
“A sufficient knowledge of the business enables the auditor to ask probing questions, more effectively challenge management, and identify when evidence is contradictory,” he adds.
Moreover, Arnold pointed out that professional skepticism is about behavior – how can auditors be encouraged to act as critical challengers? And how can quality control at the engagement level stimulate this, such as putting together a team with the right skills, expertise and experience?
Training and education is also important to infuse a professionally skeptical attitude into the “DNA” of auditors.
The question of how auditors could expand their horizons to offer more value to clients was raised, with one South African participant saying “we tick the technical box; we don’t tick the depth box. I think [the auditor moves] on too quickly”. Another added that analytical capability is missing: “[auditors have] all the technical experience but not the necessary understanding to make big picture decisions later on”.
“Each of us can, and should, stimulate this professional behavior,” he said. “It is difficult enough.”
Audits are not dying yet, but they do need to adapt to the digital age.
Arnold goes on to explain that the link between innovative technologies and understanding the business with all its ongoing changes is obvious. But equally important is the impact on new audit practices and methodologies.
The use of data analytics in the audit can lead to:
- Better informed risk assessments, through understanding the business of the auditee.
- More available evidence to support professionally skeptical behavior.
“It is important that we pursue this area with great intensity and an open mind,” Arnold said. “A constructive dialogue between businesses, auditors, regulators and standard setters is a must to make effective and efficient progress.”
One South African participant agreed with Arnold, saying that “not using technology is almost like defaulting on the quality of the audit”.
The new auditor reporting with key audit matters cannot be encouraged enough.
“It innovates the audit by clearly speaking out to users. And it provides a link to wider forms of assurance on emerging external reporting, including integrated reporting.”
For many decades, external users of financial statements and the attached independent auditor’s report received only one sentence from the auditor, the audit opinion.
“That is now changing completely,” Anton said. “Auditors will now provide a number of observations on key matters in the audit that are most relevant to users, in a very readable way.”
He concludes that it is vital that we continue to stimulate highly relevant auditor reporting.
Pat says that ACCA’s focus and expertise on the need for ethics and professional skills and acting in the public interest helps its students and members to lead in these conversations. “The focus is on developing ethical leaders rather than just technical experts in all professions.”
The ACCA qualification and CPD support resources are informed by the latest research on the future of the profession, like the professional quotients. “ACCA has expertise and collateral in these, like emotional intelligence and digital,” Pat says. “Digital is comprehensively covered at all levels of the qualification. We also offer a certificate in digital innovation as a stand alone qualification.”
To read the full report, click here.