The collapse in January 2018 of Carillion, the UK’s second-largest construction firm, owing US$1.35 billion in debt and threatening 19,000 jobs, sparked discussion about the regulatory oversight framework in the UK. It raised fundamental questions about the purpose of audit and its value to stakeholders.

An audit is an objective assessment of financial statements that should enhance the credibility of the financial statements with users. It’s no surprise then that audit regulation is a very important part of the mandate for New Zealand’s Financial Markets Authority (FMA) and will remain so.

Since the FMA started performing audit quality reviews in 2013 we have seen a noticeable improvement in the overall quality of audits in New Zealand. But we are concerned that there are inconsistencies in the quality of individual audits.

Auditor independence and investors’ perception of independence is an area of particular focus. It’s at the very heart of the role audit plays in providing comfort on the quality and accuracy of financial statements.

“The audit industry must be rigorously self-critical in assessing how auditing can be better performed and perceived.”

Audit quality is a guarantee for the end user

The purpose of this piece is not to catastrophise about the audit industry but to emphasise how important it is that the industry be rigorously self-critical in assessing how auditing can be better performed and perceived.

It must promote a better understanding of the important role auditors perform, what an audit can and can’t do, and how auditors do their job.

While an audit should provide comfort to the entity being audited, it should never be forgotten that investors are end users of the audited financial information. They should be able to rely on that information to make more informed decisions.

The FMA has commissioned a survey asking investors, fund managers, directors and managers of FMC-reporting entities, as well as auditors, how they perceive audit quality. We want to test whether the views of the profession align with those of stakeholders and investors or if there is a disconnect.

We intend to generate more conversations on this when the survey results are published later this year.

How an audit quality review is a useful tool

The audit quality review process operates as an independent, external appraisal of the quality both of individual audits and the systems and processes supporting them. These reviews are conducted by experienced auditors who have the advantage of seeing across the population of licensed audit firms.

But regulation is not an end in itself. It is only worthwhile if it is contributing to fair, efficient and transparent markets. The feedback we provide is designed to improve the audit profession. A review should not be seen as a block or an annoyance but as an important component in improving the quality of audits.

For auditors, improving the quality of their work should go hand in hand with promoting the real value of having an objective, independent audit across various stakeholders, including to the companies themselves.

Evolving the regulation as risks materialise

The FMA recognises that regulation should not stand still but evolve as the market evolves and different sorts of risks materialise. While we will still maintain individual file reviews, in the future the FMA will also be focusing more on governance. We want to see how professional services firms gain comfort about the performance of their audit function and how they create an environment for that function to flourish.

The accuracy of financial statements belongs first and foremost with company boards, as we have been at pains to point out in our quality reviews, but audit plays a critical role in providing comfort in their reliability. We will continue to work closely with the industry to increase faith in the role auditors play.

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