This article was first published in Edition 8 (January 2014) of Accountancy Futures, ACCA's research and insight journal.
Post-financial crisis, the world resembles nothing less than a vast jigsaw of regulators, auditors and investors seeking to bring about intricate, and not always connected, change.
The European Union is moving to limit the length of tenure of auditors. The International Auditing and Assurance Standards Board (IAASB) is talking about changes to the audit report and the idea of disclosing more information on how audits are performed. The UK Financial Reporting Council has been either bold or jumped the gun, depending on your point of view, in saying that companies should put their audits out for tender every 10 years. In the US the Public Company Accounting Oversight Board is consulting on audit reform including discussion of what it calls critical audit matters. India is looking at measures to provide for auditor rotation. At the end of 2013, accountancy firm KPMG picked up the audit of global giant Unilever from its rival PwC partly because the company, with its UK/Dutch roots, was anticipating a forthcoming 2016 rule change in the Netherlands forcing a regular switch of auditors.
The pace of change and the interconnecting consequences of the changes are influencing behaviours right around the globe and are likely to do so for years to come.
‘The biggest change is the exposure draft from the IAASB,’ says Shariq Barmaky, audit partner with Deloitte Singapore and South-East Asia and a member of the ACCA Global Forum for Audit and Assurance. ‘The proposed revisions to auditor reporting change the extent of reporting and communication.’
The changes echo calls from stakeholders. Brendan Murtagh FCCA, IAASB member and past president of ACCA, says: ‘There have been lots of calls for improved transparency and a greater level of understanding.’
Both sides of the equation
More information is likely to help both sides of the audit equation. Users should have much more meaningful information to work with. Auditors will be able to explain their concerns and the nature of their workload.
Barmaky says: ‘Users will be able to see the most important matters which have been discussed with the auditors and that will help bridge the expectation gap. Users will see more issues than they have seen in the past.’ This should help the auditor community around the world.
The trick, as ever, will be making the information useful. Murtagh says: ‘The real challenge will be in years two and three of this degree of disclosure. After the initial implementation the next few years can be seen to be simply the same stuff and then it becomes boilerplate.’
The effects are being felt all around the world. Consistency, though, is not. Murtagh warns: ‘If we don’t have global convergence in standards there will not be commonality or comparability and to be without that would be very damaging.’
And there is the timing as well. The time that it takes to come up with a standard which can be accepted around the world is a lengthy one. Partly this is down to the complexity of markets and companies, but partly it is down to the process itself. Murtagh says: ‘One of the problems is the length of time a standard-setter takes. It needs to be timely enough. But it is a very big challenge indeed.’
And the degree of difference around the world can seem extraordinary. In one sphere there is a demand for assurance on non-financial work – introducing integrated reporting will prove a challenge, for example. And at the other end of the spectrum audit itself is under pressure.
death of audit
Alex Fawcett, a team member of the World Bank Centre for Financial Reporting Reform, speaking in a personal capacity, says: ‘The auditing profession is dying in many countries of the world. When you look at medium-sized enterprises, those which are not public interest entities, the whole issue of pushing up the level of audit exemption combined with a high level of CPD is seen as a huge challenge along with the scale and cost of audit technology and software. In many countries we will see the audit profession disappear. State bodies will take over and the process then becomes compliance rather than pursuing a true and fair view.’
But the demand for credible, trustworthy information is set to grow exponentially. ‘There is a demand for continuous information,’ says Barmaky. ‘We are in a world of social media. In Singapore we already have quarterly reporting and it will become continuous or very frequent reporting.’
What gives people confidence is information on a regular basis, adds Fawcett.
The audit world may think it has enough change on its plate already. But there could be much more to come.
Sue Almond, ACCA TECHNICAL DIRECTOR
‘The next few years will see enormous changes in the audit market. We are already seeing regulatory change bringing rotation of auditors and more tendering for audit appointments. But it is important to ensure that this results in greater effectiveness and not just an extra cost for business. Amid all this regulatory change, we must not lose our focus on audit quality and keeping audit relevant. The real challenge ahead is to achieve global collaboration in the development of audit, including in emerging economies where, in my experience, the value of audit is well recognised.’
Alex Fawcett, WORLD BANK CENTRE FOR FINANCIAL REPORTING REFORM
‘Personally, I believe the confidence in the world of audit has gone. There is a need for a rethink on the audit report. Do we have to have one every year? Why not every three years?
‘To some degree the issue of rotation of auditors is cosmetic. Public interest entities will get closer to their auditors. The audit won’t be an annual statement; it will be a continuous process – little and often, rather than one big event. And that will push companies to report on a regular basis rather than pushing earnings to the one point in time, as many do now.’
Shariq Barmaky, audit partner, Deloitte Singapore and South-east Asia
‘We need to look at the value of audit and how it will evolve. Currently it is an audit of historical financial statements; in future it may well go beyond that. In numerous jurisdictions we have quarterly reporting and I think in the future that will become continuous information or a very frequent basis of reporting. Stakeholders will demand this and we need to understand what the role of the auditor will be.
‘With audit thresholds rising, smaller companies are not in the audit band. We need to discuss what kind of assurance should be provided.’
Member of ACCA’s Global Forum for Audit and Assurance
Keeping watch on the horizon
Scanning the horizon is an activity that comes high on the list of priorities for David Barnes, UK managing partner for public policy at Deloitte. Barnes (pictured above) is also chairman of the Policy and Reputation Group (PRG), a UK body that looks to ensure that public interest issues are at the heart of what the larger accounting firms think about and do. PRG represents the largest six UK firms, and admits representatives of accountancy bodies and the mid-tier firms as observers at its meetings.
‘It is a forward-looking body,’ Barnes says, ‘and it is there to help the largest accountancy firms to identify and respond to public interest issues. We try and look at the firms through the eyes of external stakeholders.’
It has been a turbulent time for the big firms with both the UK investigating the market for audit services and a European Union initiative to shake up competition in the audit business. Barnes says: ‘If you look back two years there was a lot of focus on those two initiatives. These processes have already resulted in enduring change in the audit profession with, for example, a clear increase in the number of tenders coming to market. Although the EU debate is still ongoing, I believe we now have an opportunity to move on. We are looking ahead at issues involving audit, tax and ethics, and also more broadly at the business and societal contribution that the big six firms make.’
On audit this will include contributing to the project which the UK Financial Reporting Council (FRC) has launched on the future of audit. ‘I recognise that the FRC needs to lead this project, but we have a lot to contribute to that debate,’ Barnes says. ‘We will be looking at both input measures like training and at external measures such as formal feedback from stakeholders like the chairs of audit committees on audit quality.’
Ethics is a large part of all this. ‘All the firms have the highest level of ethics but we need to ensure that this comes across in the ways we act and be able to explain this to the man on the Clapham omnibus.’
Barnes also wants PRG to do more work on what he refers to as societal interest. ‘The big six firms on average employ a new graduate every two hours. But we also need to look at what we can do about social mobility and so we are working to support initiatives on improving social mobility and the use of apprenticeships.’
And out on that horizon they need to be constantly looking out for issues which could affect the profession more broadly. ‘Our role is to ensure that we not only shape current thinking but also act as a catalyst to develop new thinking,’ he explains.