Date posted: 26/09/2019 5 min read

The fastest way to destroy an audit’s value

Doubts about auditors’ independence can ruin audits. That’s why NZ’s Office of the Auditor-General is setting a higher bar.

In Brief

  • The highest quality audit work can be undermined by the slightest doubt about an auditor’s independence.
  • A recent report found NZ investors hold concerns about auditors’ independence because audit companies offer other consultancy services to audit clients.
  • To remove any doubt about audit independence, NZ’s Office of the Auditor-General has limited what “other work” firms that are auditing public sector entities can perform for those entities.

The importance of independence is something I’ve been reflecting on this year. The highest quality audit work can be undermined by the slightest doubt about the independence and objectivity of that work. But both here and overseas, increasingly people are questioning the audit profession’s independence from those they audit.

A May 2019 Financial Markets Authority report found investors hold concerns about auditors’ independence. These concerns stem, in part, from New Zealand’s small market and the fact that audit companies offer other consultancy services to their audit clients.

In the UK, the Big Four accounting firms came under fire after the sudden collapse of construction firm Carillion in January 2018. KPMG had been Carillion’s external auditor, Deloitte its internal auditor, EY had been engaged to turn the company around and PwC had been an adviser.

A scathing report by the House of Commons highlighted the practice by accountancy firms of using audit services as “loss leaders” to establish relationships that would “increase their chances of winning more lucrative non-audit consultancy work”.

These comments should concern us all. Independence is an auditor’s most critical asset; it’s what underpins the value of audit. When our independence is questioned, even if we believe in substance it’s not at risk, the value of an audit is undermined.

Auditor independence brings trust

My auditors cannot compel anyone to take any actions, no matter how urgent. Instead, our power lies in our reporting to the parliament and public – our key stakeholders – to help them hold the public sector to account. We also report to the organisation itself to suggest improvements.

Our independence from the organisations we audit is fundamental to the impact of our work. If parliament or the public felt we were “working for” the organisation we audited, the value of our work would diminish significantly.

“Our independence from the organisations we audit is fundamental to the impact of our work.”
John Ryan FCA

The independence of the Office of the Auditor-General, and of those who work for us, is critical to maintaining trust and confidence in our work. We manage this in many ways – primarily by meeting the high standards of independence required under the Auditor-General’s Auditing Standards.

In these testing times for auditors, however, we are making changes to further protect our independence.

Stricter independence rules

In June 2019, I announced changes that mean audit firms engaged by the Office of the Auditor-General to audit public sector entities will be further limited in their ability to carry out “other work” for those entities. The intent is to limit “other work” to engagements of an assurance nature.

It’s critical that independence is the first quality an auditor brings to their work. We are moving our standards to reflect the fundamental importance of this. We hope others will follow suit.

I note that the UK is also considering stricter independence rules. The Financial Reporting Council is proposing to replace its list of prohibited non-audit services for firms engaged to audit publicly listed organisations with a shorter list of permitted services, all closely related to the audit or required by law or regulation.

But the journey isn’t over yet. There are more reviews underway in the UK and other changes proposed.

My challenge to the audit profession is to step up and show independence truly means independence. A fully independent mind is the bedrock on which the value of an audit is built.

Let’s re-examine our ethical and auditing standards and look for ways to maintain and, where necessary, restore our stakeholders’ trust in the independence of our audits. Because if our profession doesn’t step up on independence now, others might step in and do it for us.

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Let’s celebrate #AuditorProud Day 2019

Auditors habitually work behind the scenes, away from the spotlight, but the difference they make is profound. Businesses of all levels rely on auditors to build trust in the investment markets and companies that make the economy run. Thursday 26 September 2019 is #AuditorProud Day – a time to recognise the value of the audit profession around the globe. Let’s help clients and the business community appreciate the true value of audit.

Join in #AuditorProud Day

Financial Markets Authority’s Perceptions of Audit Quality in New Zealand report

Read the summary