Improving confidence in the value of audit

The FRC has published a research report into the current perceptions of the value of company audit.

The Financial Reporting Council (FRC) commissioned Improving Confidence in the Value of Audit to obtain an assessment of the current knowledge of and attitudes towards audit. The FRC in fact believed that for a number of years confidence in audit may have declined amongst various stakeholders groups and therefore it intended to clearly establish the perception of audit value. 

The research was performed by conducting detailed interviews of representatives of three main stakeholders groups identified as having varying levels of direct involvement in the audit process. 

The first group of respondents was a policy and legislation-based group focusing on critical political committees or roles and included MPs (members of the Business Finance and Accountancy APPG), senior fund managers from the major investment funds, senior advisers to MEPs, as well as regulators and civil servants from the UK and the EU. 

The second group included representatives of business associations, business/City journalists, relevant academics, and also relevant NGOs. 

The third group of respondents was a professional group including representatives of audit firms and accountancy bodies.

Levels of confidence

The report presents some interesting findings and in particular it highlights that stakeholders that are most closely involved in the audit process (financial directors, CFOs, audit firms, some accounting bodies and audit committee chairs) show the highest level of confidence in audit and are least likely to advocate large-scale structural reform. 

The relationship of more involvement in the audit process and higher overall confidence in audit was confirmed by the results for those with a direct interest in the outputs of audit, but with less involvement in the day to day audit process (regulators, investors, accounting bodies, politicians, civil servants, business associations) who appear to have less confidence in the current audit arrangements and are likely to propose changes to the process, culture and competitive environment. This group proposes changes including mandatory auditor rotation and capping of non-audit fees. 

The respondents who are not involved in the audit process and who are part of the wider financial community, like journalists and academics, show the lowest level of confidence in audit and are more likely to demand large-scale conceptual and structural re-assessment of audit. Their proposals included removing the statutory audit requirement and external appointment of the auditor. 

The group of respondents that showed the highest level of confidence in audit believes that the current design and structure of the audit process is appropriate to its purpose but also indicates that there is an ‘expectation gap’ between what the public understands and expects and what audit is actually designed to do. 

In particular as wider stakeholders, including the general public and media, fail to understand the purpose and remit of audit, many of these respondents feel that criticism is misplaced or inaccurate. This group therefore advocates better communication by the profession to improve public understanding of audit. 

Big Four dominance

The same group sees the dominance of the Big Four firms as the most significant issue both in terms of contributing to a negative perception of the profession and stifling innovation and choice, which ultimately affects quality. Financial directors and CFOs particularly express frustration about the lack of choice in firms with the capacity to audit large multinationals. This group of stakeholders would like to see a more competitive and dynamic audit market rather than policy interventions. 

The largest proportion of stakeholders interviewed in the research is the group that shows a medium level of confidence in audit. While this group believes that the current design of the audit process is appropriate, it expresses concern about the issue of auditor independence, which is exacerbated by the dominance of the Big Four, and about the fact that audit, as it is currently delivered, does not provide enough value to the key beneficiaries, namely investors and the public. 

The medium confidence group shows more support for policy interventions that could increase the independence and transparency of the audit process, such as mandatory rotation, mandatory retendering or limiting non-audit fees. At the same time this group would like to readdress the ways in which auditors report to provide more value to investors and the public. Some respondents would like to see reporting that offers more of a public assurance, potentially through future forecasting. 

The group displaying the lowest level of confidence in audit believes that audit should be performing a more significant public interest role by protecting the public from failing institutions and feels the current statutory remit does not provide sufficient protection to the public or benefit to shareholders. 

For the low confidence group the problem with audit is structural and therefore they suggest drastic policy interventions, which include removing the statutory basis of audit, external appointment of auditors and audit-only firms. 

The research ultimately suggests that the level of confidence that stakeholders have in audit has a very close relationship to their experience of the day to day audit process.  

It is for the FRC, and ultimately government, to establish, also on the basis of this research, whether audit confidence suffers from a problem of poor public understanding of the audit role and a few other issues, like market competitiveness or uninformative reporting, that can be addressed with better communication and targeted policy interventions or whether a radical restructure of the audit process is indeed desirable and achievable.