Auditing is evolving rapidly through the effect of technological and legislative changes in recent years as well as the environmental and economic impact of COVID-19 in 2020. These changes demand renewed focus on the future of auditing as a truly independent specialist profession in it’s own right.
The Australian Parliamentary Inquiry into Audit Quality presented its preliminary findings in relation to external audits earlier this year, including recommendations for new guidelines in relation to:
- The scope of audits, taking into account expectations of the business community and external stakeholders;
- The distinction between audits, approved and prohibited non-audit services, which is likely to lead to further separation of audit and non-audit services provided by accounting firms;
- The tenure of audit assignments, with corporations now expected to undertake a public tender process every 10 years or explain why this has not occurred;
- Auditors receiving incentives for selling non-audit services to an audited entity;
- Greater transparency around the reporting of audit inspection reports by ASIC.
Late last month, the Parliamentary Inquiry advised that they had abandoned plans to hold more hearings and will instead produce final recommendations shortly. There’s no doubt that these recommendations will need to be considered alongside the heightened sense of concern around the financial sustainability of many Australian businesses as the impact of COVID-19 becomes clearer.
In our last blog, we provided an overview of the Independence Guide to Auditing Services, published in May 2020 by the Accounting Professional & Ethical Standards Board Limited in collaboration with CAANZ, CPA Australia, and the IPA. The new requirements say that accounting and bookkeeper services cannot be provided by SMSF audit firms unless they are routine or of a mechanical nature. Also, any self-review threats must be reduced to an acceptable level.
These developments have resulted in significant reflection on the role of auditing services performed by accounting firms of all sizes. Already, top tier firms including KPMG, Deloitte and BDO are reconsidering their role as independent auditors and many mid-tier firms are likely to follow. This will only serve to place the spotlight more on smaller firms that provide audit services at an arms-length distance from tax compliance and business advisory services.
A recent report on Investor Confidence by CAANZ (September 2020) highlighted the following matters that investors will be expecting both public and private companies to disclose as a result of COVID-19:
- Expected impact on operations and results in near and long-term (60%)
- Impact on current period operating results and operations (57%)
- Impact on liquidity position and outlook (50%)
- Changes to demand for products and services (43%)
- Impact of travel restrictions on business performance (43%)
- Impact of COVID-19 on employees and the way the company works (42%)
- Impact to supply chain or distribution model (41%)
- Impact on operations in other countries (38%)
- Impact on valuation of assets and impairments (37%)
- Short term and long-term impacts on key rations (35%)
- Impact on ability to pay dividends (30%)
- Changes in key accounting judgements (26%)
How many auditors will be capable of working with their business clients to identify the impact of these matters on business performance? Clearly, this is now the predominant focus for the auditing profession over the next couple of years.
There are 2 ways of looking at these developments:
- The increased focus on independence and the specialisation of audit will constrain firms that want to provide this service as an adjunct to a broad range of financial services;
- These changes will provide opportunity for audit, particularly external audit, to be recognised as a distinct specialisation by universities, industry associations and governance bodies.
External audit can no longer be regarded as an ‘add-on’ to other financial services, but rather a specialty with its own professional standards and formal qualifications. Already, there are professional qualifications available in Australia for people who want to specialise in risk management, forensic accounting, financial planning and superannuation, but not for external auditing.
The same approach should apply to our regulatory bodies and associated policies in relation to audit services. Current regulations, qualifications and reporting are inconsistent in relation to the level of due diligence and specialisation required to audit ASX-listed companies, private companies, not for profit organisations including charities and associations.
The Institute of Internal Auditors has recently announced the creation of the Financial Services Committee, which will develop best practice guidelines modelled on existing standards for internal auditors. Who is providing the same level of attention to standards for external auditors?
In reflecting on the status of audits at this time:
- The current auditing environment in Australia is complicated from a reporting point of view. It’s unclear whether we really achieve what we set out to achieve. There is a real a need to do a complete re-think of what an audit is and how it can be performed more efficiently and effectively;
- Many auditing functions including external valuations, cashflow modelling, cost analysis and financial control systems require specialist skills and cannot be performed adequately by many current registered auditors;
- There does not appear to be any real strategy to address the skills shortage and educational requirements to be an auditor. In addition, there are few if any postgraduate courses at a master or doctorate level;
- Technology is rapidly changing the auditing process, with data collection and analysis able to be automated to a large degree, freeing up time and expertise to focus on higher level audit services for all types of businesses;
- It’s clear that a future focus on the auditing profession should incorporate not just compliance-related issues, but a real conversation in relation to the performance of audit services by appropriately qualified professionals.
In late 2019, CAANZ provided a submission to the Parliamentary Inquiry, which outlined how auditors, boards/audit and risk committees, management/CFOs, and other key participants should refocus their approach to ensure:
- Conflicts of interest are mitigated and meet public expectations;
- The level of risk tolerance and management are in keeping with the business environment, and;
- The quality of audits continues to be well resourced, robust and transparent to key decision makers.
Clearly, this change in focus will create some challenges in relation to current relationships and expectations of accountants and auditors in public practice. But given the current environment, the future of auditing depends on the desire and ability of all stakeholders to treat it as a specialist profession. Leadership from our thought leaders, policy makers and educators is required now.
Steven Watson | National Audits Group | https://www.audits.com.au/
- ASIC releases first integrated financial reporting and audit surveillance report - 17 November 2023
- Solvency and Going Concern Assessments – Post COVID Update for External Auditors - 25 September 2023
- Embracing Digital Disruption: How Auditors harness the power of technology for financial reporting - 17 July 2023