People outside the business community would imagine that the audit of annual accounts produces a ‘right answer’ or ‘wrong’.

Yet life is never that simple. Putting together financials requires professional judgment, which creates shades of grey.

The best interpretation of accounting and governance standards should present the most accurate and transparent picture of a company’s financial status.

Auditors check the numbers, and use their judgment to decide whether they present and true and fair view of annual accounts.

Those representing the biggest investors in the world want better information to help them decide whether to hold an investment, or move clients’ money elsewhere.

They believe that auditors have an easy ride, and fail to look rigorously through businesses’ collective books. Auditors need to show a greater duty of care, be more liable for their own mistakes and uncovering their clients, argue investors.

Providing ‘boilerplate’ statements in accounts is unhelpful and opaque, they add for good measure.

Unsurprisingly, tension exists between auditors and investors. A healthy situation, but recent attempts to meet each other in the middle have shown how entrenched each party’s position is.

Both put forward their cases to industry minister Margaret Hodge during the formation of the latest Companies Act.

But the introduction of a new criminal offence for auditors who ‘knowingly or recklessly’ provide an incorrect audit opinion could be toothless, argue commentators. Attempts to limit audit firms’ liability could also fall foul of the courts.
So what are we left with?

Some of the most outspoken investment representatives are still fuming about the liability issue. They see the Big Four as looking at any means to further limit their liability, whether audit quality is improved or not.

Other concerns have been voiced in the community, albeit from behind ‘screens’. The issues raised include longstanding issues over whether auditors could have done anything about companies that ‘blow up out of the blue’. ‘We don’t like surprises’ is a regular comment made by the investment community. They also say auditors are too focused on producing boilerplate sign-offs of an audit, without really getting into the nitty-gritty of the numbers, or really understanding their client.

On top of that, the Companies Act and previous case law has left auditors with little risk and therefore little impetus to provide the best duty of care, according to many in the City.

One body looking to make a positive difference in recent times is the Audit Quality Forum.

Chaired by Ernst & Young partner Gerald Russell, the ICAEW-organised body has met to discuss investor concerns and those of all stakeholders in the audit process, including the audit firms themselves and standard setters.

Unfortunately, it appears that the issue of audit quality is one that could be impossible to reach agreement on, according to Russell. ‘The trouble is that quality means different things to different people,’ he explains.

Russell confirms that there is little to raise cheer for investors from the recent Companies Act, as it provided nothing directly related to improving audit quality.

What he does see buried within the legislation is wording that could have the opposite effect, meaning an increase in box-ticking and the removal of professional opinion from the audit itself.

The ‘knowing or recklessly’ aspect of the Companies Act’s drafting on a criminal offence for auditors is actually split in two.

The first part describes anything material missing from the audit, but the second part relates to the omittance of a statement required under sections of the Act relating to accounting standards.

Russell explains that the second part could open up auditors to being held criminally liable for not checking the minutae of a company’s accounts, as it does not relate to material matters. ‘Our fear is it might damage audit quality, that boxes are ticked and people have their backsides covered, so auditors could move away from being thinkers,’ says Russell.

Auditing the very smallest details of the accounts detracts from quality rather than adds to it, he believes Companies producing controversial figures, or at least those that cause consternation among auditors, often have the contentions issues ironed out through discussion and negotiation.

This use of experience to come to a sensible conclusion for all parties interested in the financials could be removed because of the criminal offence, so more audit qualifications could follow.

Even without looking at the particular wording of the Act, Russell argues that as good audits are a matter of professional opinion, the one thing that investors hate ­ box-ticking ­ will become the audit norm.

Yvonne Lang, national technical director at Smith & Williamson, agrees that the biggest hurdle for audit quality is the difference in views of what an auditor does and why the auditor does it. In turn she sees the AQF as a ‘useful body’ that is trying to look at auditing and make recommendations to raise qualities.

But while investors want auditors to provide greatly detailed information about the things a company does and why it does it, there will always be problems.

In reality, Lang argues, auditors are just not there to serve that purpose. ‘Disclosure of information is set in accounting standards and legislation, there’s more emphasis on the discursive side at the moment, but it’s always a balance of commercial sensitivity and compliance,’ he says.

‘The expectations gap is still there. Different people have different views of what they expect auditors should achieve.’

But auditors can’t really give a statement on how well a company is managed, Lang explains.

‘What about information about the company? It’s fraught with problems and the risk to the auditor is huge. So what would you be trying to achieve?’

Investors want auditors to dig deep and reveal more about clients. But the more they do so, the bigger the risk they put themselves in over what they reveal and how that information is interpreted. Auditors do not sit on boards all year round, says Russell.

This is the counter argument to those opposed to limited liability.

More protection for auditors will open up the possibility of more rigorous and better quality work.

But the time is ripe for change, or at least evolution of an auditors’ duties and the way they are presented.

The Auditing Practice Board is about to open up consultation on the topic of audit quality.

Lang believes that in reality the relationship between investors and auditors are ‘not bad’.

Both sides have expressed concern over the potential shift to more rules-based accounting and auditing standards, something that could be on the cards as US standards setters attempt to throw their significant weight about in the convergence arena.

Inevitably, attempting greater audit quality through limited liability, and concerns of a US dominated regulatory climate, will lead to some interesting and passionate comments when consultation begins.