Can we trust our auditors?

This week an Australian inquiry into the regulation of auditors held its first public hearing – the latest shot in a wave of reviews and inquiries into auditors around the globe. CAANZ president Stephen Walker looks at how auditors should deal with questions of  trust, independence and conflicts of interest.

Globally the audit profession is facing a wave of regulatory reviews and inquiries. In the UK, in Australia, and also at home.

This week our Financial Markets Authority reported on the country’s audit firms.

The FMA praised an improvement in audit quality, but found auditors continue to apply standards inconsistently.

Auditor independence and related-party transactions – issues driving overseas regulatory reviews – were specifically highlighted by the FMA.

As a profession, auditors need to work even harder to manage perceived and real threats to independence – not just to recognise them, but also to mitigate them.

Auditors must also be prepared to have their judgements scrutinised, be open to different views and, where necessary, to have the courage to stand their ground.

For shareholders and members of the public, audit quality is grounded in trust of the auditor, and trust that the auditor is free from conflicts of interest.

They must trust the profession’s judgements and, ultimately, a process that delivers high quality reporting.

Trust underpins a good audit

Can I trust the numbers? Can I trust the finance team that crunched the numbers? Can I trust the audit partner? Can I trust the Board has asked the right questions?

In the vast majority of cases the answer is yes, yes, yes, and yes.

But some people are now saying maybe, and the public and media debate around corporate reporting has raised questions about auditors’ role and performance.

As expectations evolve, auditors have to relentlessly protect and live by their ethical standards.

The profession can’t stand still when it comes to what it does, and how it works to cover the evolving risks that matter to investors and the public at large.

And it must listen and learn from the entire range of perspectives.

At the same time, there is a reality here that also needs to be acknowledged.

Audit quality standards in New Zealand – and Australia for that matter – are already high and subject to some of the strongest regulatory frameworks in the world. There are about 1,100 pages of audit standards.

Chartered Accountants Australia and New Zealand president Stephen Walker. Photo: Supplied.

But that’s no cause for auditors to rest on their laurels.

More work is required by companies, directors and auditors to further strengthen trust among investors and the public.

There has been a longstanding expectation that audits report on future viability, fraud and misconduct.

The Brydon Review in the UK is an official response to the public demand for audit work to expand in scope beyond traditional financial reporting.

The review was launched following the collapse of UK contracting and construction giant Carillion in 2018.

The Brydon Review is likely to have ramifications outside the UK, which pioneered enhanced audit reports, and which led the rest of the world.

Meanwhile, across the Tasman, a Parliamentary Joint Committee inquiry into the regulation of auditing in Australia is due to report by March 2020.

The first public hearing took place in Sydney yesterday.

Auditor? Or consultant?

The inquiry’s terms of reference include the relationship between auditing and consulting services, the effectiveness of competition, and audit quality.

Chartered Accountants Australia and New Zealand’s submission to the inquiry takes the form of a 15-point plan to increase public confidence in audit, ensure the continued relevance of audit scope and continue to strengthen the quality of audit.

It sets out how auditors, boards and audit and risk committees, management and CFOs, and other key participants in the chain should refocus their approach.

The plan has been developed in an Australian context, but will translate internationally, including in New Zealand. No doubt it will need some adjustment to fully apply to our unique market, but any change should be relatively minimal.

Trust and ethics have got to be at the heart of the future of the audit profession.

The future of audit is bright, and the value of independent audit and wider assurance has never been greater. But the audit profession can’t get to this golden land by itself.

It is important that regulators, recipients and the stakeholders of audits work together with auditors.

This is done now, but to make the most of the opportunities, everyone needs to stop, collaborate and reset.

The work will sometimes be robust, but always focused on where objectives align – the public interest.

Trust and ethics have got to be at the heart of the future of the audit profession.

Auditors can successfully harness the opportunities offered by technology, modernise all those pages of standards and expand into new exciting territories.

But all these gains will amount to little without the trust of everyone auditors work with, and for.

This article is an extract from Chartered Accountants Australia and New Zealand President Stephen Walker’s speech to the New Zealand Audit Conference delivered on November 19.

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