Regulator fears auditors may abandon scepticism to meet deadlines

Auditors are being tempted to ignore their instincts if it could result in a
delayed audit, according to the UK’s reporting regulator.

The Auditing Practices Board (APB), which sets standards for the industry, is
concerned auditors might be abandoning their professional scepticism to meet
contractual audit deadlines, and wants to coach them in how to be sceptical.

Audit contracts are often negotiated on the assumption few problems will be
revealed, according to the APB. When a potential issue does arise timetables
often have to be extended.

The APB fears there may be an incentive to “adhere strictly to the plan” and
keep within the original time limits, instead of extending an audit timetable
and investigating questionable transactions or policies.

“Particular problems are likely to arise if scepticism results in a delay in
the completion of the audit,” the APB said in a discussion paper on auditor
skepticism, released today.

“Delays caused by the auditor pursuing additional inquiries that cause the
audit not to have been completed by the agreed date can be problematic,
especially if the auditors’ concerns prove to be unfounded.”

The report is part of a larger push to change auditors’ behaviour,
particularly in the financial services industry. The Financial Services
Authority (FSA) last month said auditors displayed a “worrying lack of
skepticism” when inspecting banks’ asset valuations.

The FSA in particular found little consistency between major financial
institutions valuation systems for difficult-to-value financial instruments.

Last month, the audit watchdog, the Audit Inspection Unit, also found
instances when “it was unclear from the audit files whether the audit teams had
obtained an adequate understanding of the basis upon which the prices used had
been determined”.

The banking industry has become a particularly problematic area for auditors
and regulators. Large banks find it extremely difficult to change auditors owing
to conflict of interest rules. Qualifications or auditor resignations are
extremely rare because of the catastrophic affect it could have on a bank’s
share price.

Richard Sexton, head of assurance at PricewaterhouseCoopers said there
remained a “lack of any compelling evidence” there was a problem with auditors’
scepticism.
“The regulator’s perspective appears to be at odds with that of the auditing
profession,” he said.

“The auditor’s role is to ensure management has appropriate robust evidence
to support its assumptions – It is not our job to present an alternative view
with the aim of persuading management to accept it is better than theirs.”

Martyn Jones, audit technical partner at Deloitte, said he would welcome a
debateand believes there should be greater guidance on the audit of asset
impairments.

Further reading:

New
FSA powers will force auditors to speak out

Audit:
time for change