Intense debate about the ‘expectation gap’ in auditing is unfolding in the UK, set against a government review into the value and effectiveness of the audit process.

Audit professionals around the globe are watching. Sir Donald Brydon, the review’s chair, has declared “change is in the air” when it comes to the purpose and scope of audit. He has called for views on control attestation, culture audits, non-financial assurance and even cybersecurity audits.

A UK Parliamentary Committee has noted: “If the performance of auditors against the current regime needs to improve, the audit product itself also needs to evolve in fundamental ways.” The UK Competition and Markets Authority found “a strong case for reviewing the purpose and scope of audit to consider the issues holistically.”

Could all this bring audit closer to meeting the demands of investors and the public?

At the moment, auditors are a lightning rod for the malcontent that follows when things go wrong. People already expect more from auditors than is within their scope when it comes to ‘preventing’ corporate collapses, immaterial fraud and a range of broader governance issues.

A survey by CA ANZ and ACCA of 2000 members of the public in Australia and New Zealand confirms that the role of auditors is commonly misunderstood. The research reveals well over one-third of the general public expects auditors to always detect any fraud, and more than half believe that audit should evolve to prevent company failures.

“Well over one-third of the general public expects auditors to always detect any fraud, and more than half believe that audit should evolve to prevent company failures.”

Who is really responsible for a corporate collapse?

An audit doesn’t offer immunity against anything ever going wrong in a business. Directors, management and the whole financial reporting supply chain have their parts to play, along with a dose of realism when it comes to the risks of investing and the capital markets.

Corporate collapses are an unavoidable part of any market-based economy, but the shock when it happens leads to disproportionate impacts and outcry.

When you look at how decision-making plays out in a company faced with financial difficulties, the weekly, daily or even hourly strains of plugging cash-flow gaps and securing finance are pivotal.

A panicked short-termism is often present in corporate collapses that suddenly reach a crisis point.

Early detection is the best prevention. Clarity in governance and accountability can make all the difference in promoting bigger-picture, longer-term decision-making.

Such an approach can steer things out of difficulty, or at least limit the damage.

A rigorous control environment under the custodianship of management and directors including, for instance, how continuity and fraud risks are dealt with, and the quality of financial reporting, are prime. With the right framework, auditors can have a valuable role in providing independent assurance.

Is there a potential for watershed change in auditing?

Financial statement auditors already play an important part in challenging the soundness of accounting estimates including testing intangibles, the going concern assumption and exposing material fraud. But given the speed of business and the economy, this is far from a fail-safe against stakeholders being surprised when financial challenges tip over into crisis, or an immaterial fraud situation flies under the radar.

The catchcry of “where were the auditors?” has led to scope creep, with new expectations and risks being bolted onto the financial statement audit.

A watershed is needed to move into a modular designed audit world, where other types of audits and assurance are clearly distinguished and given due prominence and value. This would provide clarity to investors and the public as to what comfort they can and cannot reasonably take from auditors’ work.

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