Following the corporate collapses of Carillion, Patisserie Valerie and Thomas Cook, in the UK people also asked ‘where were the auditors?’ In response, in March 2021, the UK’s Department for Business Energy and Industrial Strategy (BEIS) announced it was launching a consultation to reform the UK’s audit and governance regime.
The BEIS proposals build on recommendations of previous reviews – led by Donald Brydon, John Kingman and the Competition Markets Authority – and include requiring large audit firms to use ‘challenger’ firms to do a substantial part of the audit and putting a cap on the market share of large firms. Also, a new regulator would be introduced with powers to split the audit and non-audit functions of accountancy firms to reduce the risk of conflicts of interest.
On the issue of whether the Big Four accounting firms need to be broken up, Kevin Dancey, CEO of IFAC, says the companies being audited are large – with large extensive operations around the world – and the scale of the audit firm has to match. Also, points out Dancey, “To stand up to a big organisation you have to be big yourself or you could be cowed.” Peterson agrees that the ‘challenger’ audit firms would be unable to take up the degree and quantity of work that would be necessary.
There is an issue with non-audit services and the perception that this could impact the independence of the audit firm. Dancey says that an audit-only firm would not be able to attract the right people to do a high-quality audit. “The audit firm needs to bring in expertise in other areas as well – such as tax – and you can do that within the multidisciplinary firm,” says Dancey.
When asked to comment on the global trend of audit reform, Dancey says, “I think the journey of audit is always how we can do better,” he says, adding that the world is evolving and the profession is always looking to make the process more efficient for all stakeholders. “At IFAC we always look at it through an audit quality lens,” he says, explaining that he takes a step back and questions if any reforms will enhance audit quality or not – a different approach from those who focus on competition. IFAC has outlined the five factors it believes are necessary for a high-quality audit. These are the right process, the right people, the right governance, the right regulation and the right measurement.
On the question of how the audit process could be better, Peterson questions whether the way they are currently done has lost their usefulness to companies. He argues that the idea of a ‘true and fair view’ opinion has lost its value. He says that audit committees and chief financial officers would rather spend their money on a more nuanced and bespoke report that goes into detail on particular countries or departments, for example. “There are regulatory and political constraints on the firms being able to do that,” Peterson says.
Also, he notes in a journal article, that the pass/fail nature of audits is too simplistic and inadequate. This is something that Kelly raises: “Audit inspections are difficult for readers to use. The audit committees do not really know what an audit inspection is telling them.”
If the needs of companies in this respect are already complex, they are set to become even more so. The expectations of what corporations need to report is evolving and Dancey sees a growth in the demand for corporate reporting on environmental, social and governance issues (ESG). He says attention needs to be paid to the sustainability issues – “Sustainability is real and coming to a company near you – avoid this at your peril,” he says. “The treasurers and CFOs of the world cannot treat this in siloes.” They need to have an integrated approach in their company so senior management and boards can make good decisions. Also, they need to have the right reporting in an integrated and responsible way, says Dancey.
This points to a change in skills that will be needed in the future. In the UK’s Brydon report there is the idea of a new professional designation of a ‘corporate auditor’, who could provide multi-disciplinary services across what a corporate requires. This could involve a range of subject matter expertise that will be needed from the profession in areas such as the environment and cyber-security.
In terms of the skillsets needed for this, Dancey comments that accountants are well placed to take this up because of their expertise in quantifying information and corporate reporting. With ESG reporting, for example, Dancey says “Professional accountants have the skills to deal with these issues,” says Dancey.
While accountants may not be well versed in these other areas at the moment, Dancey comments this is why multi-disciplinary firms are important because they can draw on experience of others with different subject matter expertise.
These are just some of the issues that the audit profession is grappling with, both in Asia and other regions in the world. As it addresses the failures of the past, it also needs to look to the future and accommodate the evolving needs of corporates, and also move beyond the cycle of public outrage of people asking where they were.