Date posted: 05/04/2019 10 min read

Audit quality is good, but can we do better?

Audit quality in Australia and NZ isn’t bad, but the profession still has to work harder to address regulators’ concerns.

In Brief

  • In Australia, ASIC’s 2017–18 audit inspection program report found that in 24% of 347 key audit areas, auditors failed to obtain reasonable assurance that financial reports were free from material misstatement.
  • In New Zealand, the FMA’s Audit Quality Monitoring Report for 2017-18 found that 14 out of its 15 areas of focus were either fully addressed or showed improvement.
  • While audit experts agree that audit quality in Australia and New Zealand is good, the public and regulators are demanding ever more certainty from auditors.

The latest audit quality inspection reports from regulators in Australia and New Zealand sparked yet another round of media coverage questioning standards in the audit profession. However, audit experts argue that audit quality around the region is, in fact, good and getting better. They also warn the yardsticks being used to rate the profession can be confusing and misleading.

Right now, regulators can’t even compare audit quality from year to year. The International Forum of Independent Audit Regulators (IFIAR) notes that because audit quality is so hard to measure consistently, many accounting bodies and regulators (including those in Australia and New Zealand) talk about audit quality indicators rather than measurements.

Indeed, there is an international debate about how to measure audit quality.

The Monitoring Group – a body set up by global financial regulators including IFIAR, the World Bank and the Basel Committee on Banking Supervision to oversee audit standard setting – is also examining possible changes to the governance of international auditing and ethical standard setting.

Conflicting views on Australia’s audit quality

The Australian Securities and Investments Commission (ASIC) defines the auditor’s role as being to “obtain reasonable assurance that the financial report was free from material misstatement”.

Its 2017–18 audit inspection program report, released on 24 January 2019, found auditors failed to do this in 24% of the 347 key audit areas in ASIC’s survey across 98 audit files.

That represents a slight improvement on the 25% failure rate in 390 key audit areas recorded in the previous 18-month period – a result former ASIC boss Greg Medcraft described at the time as “appalling”.

ASIC put plenty of caveats on its latest round of results. For a start, it clarified that not all of the 24% of audits found wanting necessarily had material misstatements – but just that the auditors didn’t do enough work to be sure there weren’t material misstatements.

In addition, the corporate regulator noted that the files and audit areas it picks are not random but “risk-based”, meaning that it’s problematic to compare results between periods.

ASIC commissioner John Price also acknowledged there had been improvement in the audit quality and consistency at the largest six firms. “However, the overall level of findings still suggests that further work and, in some cases, new or revised strategies, are needed to improve quality,” he said.

“The overall level of findings still suggests that further work and, in some cases, new or revised strategies, are needed to improve quality.”
John Price

Then, three weeks later, on 15 February 2019, out came a Parliamentary Joint Committee Statutory Oversight Report on ASIC that devoted more than a third of its length to audit quality and stated that “ASIC’s audit inspection program appears to show an ongoing deterioration in audit quality”, but also noted that “a decline in audit quality may not be the only conclusion that could be drawn from these figures” and “what may be happening is that ASIC is improving its targeting”.

The joint committee report picked up many of the concerns about audit that have been voiced around the world in recent years. One worry is the potential for conflict of interest. The report noted that Big Four accounting firms now dominate large-company audit, yet earn most of their revenue from non-audit services and discussed how possible conflicts are managed.

The report also quoted Glen Unicomb, a former ASIC forensic investigator, who said auditors with Big Four firms risk being exposed to pressure from executives to approve reports so as to protect lucrative advisory relationships.

Bill Edge, chair of Australia’s Financial Reporting Council (FRC), warned the parliamentary committee that if a company saw an audit as a commodity and paid the lowest audit fee it could, it would likely get a poorer standard of audit. But at the same time, overall the FRC has described Australia’s audit industry as following “world’s best practice”.

Defending audit quality in Australia

Robin Low FCA, the deputy chair of the Australian Auditing and Assurance Standards Board (AUASB), says there has been more scrutiny of the local audit profession over the past few years.

“There has been an increased focus, despite few high-profile audit failures in Australia recently,” Low says, pointing to former ASIC boss Medcraft’s parting shot at audit quality standards and the collapse in January 2018 of Carillion, the UK’s second-largest construction firm, as two factors that have fuelled media attention.

But has there been any improvement in audit quality due to this heightened scrutiny? Low hits back at the assumption an improvement was needed.

“The question pre-supposes a problem,” she says. “My experience is that generally audits are conducted professionally to the required standards and the standards continue to raise the bar.”

New Zealand audit in focus

On 26 November 2018, New Zealand’s Financial Markets Authority (FMA) released its Audit Quality Monitoring Report for the period July 2017 to June 2018. For that 12-month period, the FMA looked at five of New Zealand’s 19 registered audit firms, including two with more than 10 licensed auditors.

The report’s bottom-line finding was that each audit firm reviewed had made improvements in the areas where the FMA had previously highlighted issues.

Darby Healey CA, who heads the audit quality team at KPMG New Zealand, says the FMA’s latest audit quality inspection report was “all in all, really positive”.

“The focus on quality is being ingrained in all audit firms.”
Darby Healey CA

Though the FMA only looked at a sample of firms, Healey notes that 14 out of its 15 areas of focus were either fully addressed or showed improvement. “The focus on quality is being ingrained in all audit firms,” she concludes.

Continual improvement in audit quality needed

PwC Australia’s managing partner for assurance, Matt Graham, says auditors in Australia and New Zealand generally deliver good audits. “The quality of the audits we perform is of fundamental importance to our whole firm,” he says. “It’s a consistent part of our strategy... we realise just how critical the role we play in the capital markets is.”

Still, Graham acknowledges that the profession needs to work at continuous improvement in audit quality, “because that bar will continue to rise”.

Amir Ghandar, Chartered Accountants Australia and New Zealand’s reporting and assurance leader, adds that many firms are already doing more to better understand and address the underlying reasons behind audit issues.

But the public is demanding ever more certainty from auditors, and expects more of the corporate world generally. Audit quality needs to keep responding.

Read more:

ASIC’s Doug Niven FCA will talk about the regulator’s focus areas in 2019 at the CA ANZ 2019 Audit and Accounting Conference series.

Click for more information or to register for the CA ANZ Conference in Sydney 9-10 April and Melbourne 7-8 May.

CA ANZ has a range of audit quality resources. Find them here.

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