THE PRICE WAR raging between accounting firms is damaging the quality of audit work as firms cut corners in an attempt to reduce costs, the industry watchdog has warned.
Margins have been squeezed across the board as a result of savage price competition for the audit tenders of large listed entities.
The fee environment, which has been described as ‘brutal' and ‘the most challenging' some partners have ever seen, has resulted in firms slashing costs, putting the quality of audit work at risk.
In its annual report into the industry's performance, the Financial Reporting Council found that firms had been cutting costs by off-shoring certain audit procedures, delegating work to junior staff, using more checklists and other efficiency measures.
"We see risks around commercial pressures and believe that needs to be managed carefully," said Paul George, executive director of conduct at the FRC. "Audit needs to represent value for money but there needs to be appropriate controls to ensure that giving significant fee reductions doesn't undermine the quality of work being performed."
The report, issued by the FRC's Audit Inspection Unit, also accused auditors of not being sceptical enough in the conduct of their work. The industry has come in for criticism from regulators for its failure to challenge management assertions before the financial crisis, and while it has undertaken actions to be more sceptical, there is still some way to go.
George said the FRC would give firms support for the initiatives that have been undertaken to improve auditor scepticism, but might equally criticise them because the benefits of those actions have yet to materialise.
Of particular concern was the way impairment of goodwill and other intangibles were audited.
According to the FRC, a ‘significant' number of issues were identified, including insufficient evidence of challenge to the key assumptions, and concerns regarding the adequacy of the related disclosures. Auditors were also told they must challenge more what they are told about a bank's loan loss provisions.
Significantly, the FRC's findings suggested that audit teams did not always fully understand the accounting and reporting requirements for goodwill impairments, which resulted in impairment reviews being accepted based on profit forecasts rather than cash flows.
Questions were also raised about another contentious area of the audit market: auditor independence.Proposals by European Commissioner Michel Barnier to split the provision of audit and non-audit services has met with opposition from the profession, yet auditors are still failing to "understand or appreciate" the importance of applying ethical standards to auditor independence.
The FRC said it is concerned that, more than seven years after the Ethical Standards were introduced, there has been no improvement in this area.
George said that firms must reconsider the adequacy of their procedures and training in this area.
"They are not particularly good at identifying specific threats [to independence] and even when they do identify them, they are not very good at establishing safeguards," he said. "The firms really need to adopt a stronger approach. If they don't, do we need another model?"
Despite the problems, the FRC said that overall the inspections in the year to March 31 had shown an improvement in results. The number of audits requiring significant improvements fell to eight cases from 11 the previous year. The proportion of audits assessed as good with need of limited improvements remained consistent with previous years.
Key terms and phrases used in the article eg the fee environment; the quality of audit work at risk; delegating work to junior staff; using more checklists and other efficiency measures; not being sceptical enough all dogmatically fit for our audit practice environment! We are part of the globe.
Audit quality is better ensured if the auditors cherish a culture of the best practices following the practice guidelines including Professional and Ethical Standards. In this regard a competent audit team with diverse knowledge and experience is also of paramount importance. We all appreciate that statutory audit crawls to cover a vast area ie whole business of the client. Statement of Financial Position shows the status of the business as a result of past performances, and the Statement of Comprehensive Income tells us about its current performance. Both of the components, inert-alia, in accumulation help us predict the client's prospect. Nowadays, in this litigious world, we- auditors are concerned about the audit client's ability to survive (innumerable risks out there are tumultuous and turbulent for the business) aggravated by the unfortunately overlooked 'Corporate Governance' of the house. Auditors should be equally smart as the business managers to understand those risk factors.
AUDIT IS A RISKY BUSINESS.
Adequate senior level input as required can direct the whole team towards a successful completion of a quality audit, since most of the judgments we apply in the audit come from their overall knowledge about the client's top management and the auditee's operating industry, history etc.
During audit whatever information we receive from the client's management can be challenged if we can process the information with diligence and interest. In-house consultation is instrumental.
Generally, the management of audit client (the responsible party) wittingly or unwittingly tend to provide auditors with as less information as they could (may be 25%-35%, as I empirically say), however, our duty as auditors is to gather and elicit no less than 75%-85% information as supporting evidences to form a reasonable assurance for the users of our report. The challenge lies here. Apparently many things seem OK, brilliantly drawn out in line with framework, thanks to the knowledgeable managers- at times our training mates, who know our modus-operandi!
TIME HAS COME TO BLEND AUDIT WITH SOCIAL SKILLS.
Audit is a respectable profession. We partner the guardians of the business world. We have to be capable.
Tofazzul Hussain FCA (848)
Posted by: Tofazzul Hussain FCA, 14 Jun 2012 | 09:21
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