Date posted: 17/06/2019 5 min read

Raising the bar on audit quality

The bar against which the audit profession is measured is constantly rising, so what steps can propel continual improvement?

In Brief

  • High-profile corporate collapses have propelled greater scrutiny of the audit sector.
  • The emphasis on audit has led to improvement, but it is just one part of the financial reporting supply chain.
  • Quality reviews, inspections programs, root cause analysis and audit quality action plans are all tools for improving audit quality.

Government regulators began to take on audit oversight and inspection programs following the dotcom boom in the early 2000s and high-profile corporate collapses, including Enron. It started with the establishment of the Public Company Accounting Oversight Board (PCAOB) in the US in 2002. The International Forum of Independent Audit Regulators (IFIAR) followed in 2006 and now includes audit regulators from 52 jurisdictions.

In the years since, the infrastructure around how audit quality is achieved and improved has evolved. Along with audit inspections and quality reviews, auditing standards themselves have been further developed. Auditing’s standard-setting bodies, regulatory forums, mutual recognition and oversight mechanisms now rival any other profession’s.

Auditing has a vital objective: to provide reliable financial information in the capital markets. Quality reviews and inspections programs are not just for detecting or reporting on issues; they are there to drive constant improvement. But they’re not the only tools.

“Auditing has a vital objective: to provide reliable financial information in the capital markets.”
Amir Ghandar CA

The OECD’s Best Practice Principles for Regulatory Enforcement and Inspections state that “inspections and enforcement cannot be everywhere and address everything”, pointing to the need for a collaborative and broad approach to achieving regulatory objectives.

The push for further improvement

Root cause analysis is one such initiative for improving audit quality. Others include audit quality action plans, which exist in audit firms at an international level and across Australia and New Zealand.

There is often a slew of negative media headlines surrounding the release of audit inspection reports. But, for several reasons, often it’s hard to tell if the results show audit quality is the same, better or worse.

Audit inspections, by their nature, focus on areas that are less than perfect. Regulatory best practice is to take a risk-based approach that uncovers problem areas and drives improvement. Because of this, audit inspections focus on different areas in different years.

In addition, in recent decades the nature of auditing itself and the auditing standards against which performance is measured have evolved dramatically.

The bar against which the profession is measured is constantly rising.

In 2017, IFIAR reported that it was working with international audit firms to achieve a decrease of at least 25% over four years in the percentage of inspected listed public interest entity audits found to have at least one compliance issue.

In New Zealand, the Financial Markets Authority points to remediation plans put in place by the firms it inspects as having a positive effect. In Australia, comprehensive audit quality action plans have been in place over the past six years, incorporating root cause analysis.

With the release of the Australian Securities and Investments Commission’s most recent audit inspections report, its commissioner, John Price, said: “We recognise the efforts by firms to improve audit quality and the consistency of audit execution, which is reflected in some improvements in findings collectively for the largest six firms.” He also pointed to the need for further improvement.

Audit quality is a broader responsibility

Ultimately, auditing is part of the process to get us to the outcome of quality financial information. A genuine evaluation needs to focus on outcomes, and on the whole supply chain for financial information.

There’s no doubt that the emphasis on audit has led to substantial improvement, but perhaps it’s time the lens widened to a broader set of the players involved in informing our economy and capital markets.

Directors, audit committees, financial executives, and regulators themselves are all part of the financial reporting supply chain. Collaboration and accountability among all the players is needed to deliver confidence and reliable information for the markets.