In recent years, ASIC has consistently expressed concern about the quality of corporate auditing in Australia, with the Commissioner calling on audit firms to “continue to evaluate the effectiveness of their current initiatives to improve audit quality.”
ASIC is committed to working with auditors to improve confidence levels surrounding statutory financial reporting. The development of new technologies for data processing and analytics is an important part of this process. However, it is clear that directors and managers of audited firms are responsible for improving culture and corporate governance in relation to financial and management reporting. External auditors need to be in a position to identify lapses in corporate governance and suggest solutions to their clients. A collaborative approach between companies, auditors and ASIC is the only way to achieve desired outcomes for shareholders.
As an integral part of this collaborative process, ASIC Commissioner Sean Hughes has proposed that findings from audit inspections should be provided to the directors of entities audited on a routine basis, rather than the current exception basis.
This policy change intends to assist audit committees and business directors in engaging directly with their auditor to determine the necessary steps required to address any issues identified and ensure that the audit is adequately resourced.
Specifically, findings will be communicated to directors where ASIC;
- has formed the view that an auditor has not obtained reasonable assurance that the entity’s financial report is free of material misstatement;
- concludes that audit work should be improved in future years, even though reasonable assurance was obtained that the financial report for the current year was free of material misstatement;
- has concerns that the auditor did not meet the independence requirements of the Corporations Act (including professional requirements), has not addressed the matter, and has not adequately reported the matter in an auditor’s independence declaration; or
- discovers any other matter(s) requiring the attention of the directors or audit committee of the audited entity.
Consultation Paper 352 (communicating audit findings to directors, audit committees, and senior managers) was released on 2nd December 2021, with comments closing on 11th February 2022.
Audit Inspection Report findings comparable with previous year:
In the most recent audit inspection report for the period 1st July 2020 to 30th June 2021, ASIC found that insufficient work was done in 23 percent of the 115 key audit areas reviewed across 35 files from the six largest audit firms: Deloitte, EY, KPMG, PwC, BDO, and Grant Thornton. This is a minimal change from the 24 percent disclosed in the previous reporting period.
ASIC noted that negative findings from their reviews of audits do not necessarily mean that the financial reports audited were, in fact, materially misstated. Rather, in their view, the auditor did not have a sufficient basis to support their opinion on the financial report. They also noted that their audit inspections focus on a limited number of more complex and challenging audits.
Other recommendations from the Audit Inspection Report:
In the report, specific initiatives identified to improve audit quality included:
- promoting a strong culture focused on audit quality;
- attracting and retaining the right talent for complex audits;
- thorough supervision and review of audits; and
- holding partners, managers, and staff accountable for audit quality.
It is clear that staff recruitment and retention continues to be a major challenge for the industry. Restrictions on travel into Australia and within Australia are likely to decrease over the next 12 months. In the meantime, staff engagement is essential, including regular review of remuneration, managing workloads, embracing diversity, providing mentoring, and a general focus on well-being.
The changes in business practices and initiatives implemented by individual firms with the aim of improving organisational culture may take time to demonstrate an impact on the negative findings. Therefore, regular monitoring and assessment within audit firms is essential to stay on track.
There’s no question that a forward-thinking approach is required to keep up with the ever-increasing challenges when it comes to audit quality and confidence in financial reporting.
To improve audit quality, ASIC will continue to work with audit firms to identify the root causes of negative findings, develop and implement action plans to address the identified causes, and monitor and revise these action plans to ensure they are effective.
Auditing is a specialist profession and can no longer be regarded simply as an ‘extension’ of services provided by accounting and consulting firms, even when there is no direct or perceived conflict of interest. A dedicated focus from specialists is required to achieve and manage client and regulatory expectations.
Over the past 18 months, the National Audits Group has continued to evolve as an audit-only firm with a strong national presence and capabilities in relation to financial statement audits, compliance and regulatory audits, internal and IT audits, and SMSF audits.
Steven Watson | Director, National Audits Group | firstname.lastname@example.org