Written by Andrew Gambier, head of audit and assurance, ACCA
JUSTICE POTTER STUART was writing about something much less wholesome than audit quality when he famously opined “I’ll know it when I see it”. But his words apply fittingly to the subject too. The very nature of auditing means that other than audit regulators, most of us never get to see it. Faced with something that many people can’t completely define and most cannot see, a number of organisations have attempted to draw up a set of other measures which can be used to indicate the presence or absence of audit quality.
FEE, the European Federation of Accountants, has recently updated its compendium of audit quality indicators. This brings together the outputs of many of the projects on audit quality indicators being undertaken globally. This includes projects by, among others, the US Public Company Accounting Oversight Board (PCAOB), US Center for Audit Quality, the FRC and Chartered Accountants Australia and New Zealand. FEE intends to continue to update its report as further work is done.
ACCA is a contributor to this debate, through its collaboration with Macquarie University in Australia. The final report in this collaboration was published in July: Directors’, CFOs’ and auditors’ perceptions of audit quality attributes: a comparative study. This report collates the findings of three earlier reports in the series and compares what non-executive directors, CFOs and auditors think about the relative importance of various audit quality indicators. The authors anticipated that each group might have different views of audit quality. Auditors should have the clearest view, as it’s their audit. CFOs are further from the audit on a day-to-day basis, but still have some interaction with the audit team through the course of the audit. Non-executive directors are most distant: they perhaps only interact with the audit engagement partner at the final stages of the audit.
The authors found some commonality between the groups. All three groups ranked ‘audit firm size’ as the most important indicator of audit quality relative to the others. However, unsurprisingly, auditors from large firms tended to think the largest firms were best, whereas auditors from the next tier of firms argued that their quality was every bit as good. All three groups also agreed that ‘partner/manager attention to the audit’ was the next important, with ‘communication between audit team and client management’ also scoring well relative to other characteristics. By contrast, none of the three groups rated ‘tenure of audit partner’ nor ‘audit quality assurance reviews’ highly. That’s not to say they didn’t think audit quality assurance reviews are important; rather, they believe other factors are more important in indicating audit quality.
There were also some differences. Auditors, perhaps unsurprisingly, did not see ‘provision of non-audit services’ as relatively important, whereas CFOs and directors did view it as salient. Similarly, CFOs and directors respectively ranked ‘partner knowledgeable about client industry’ and ‘senior manager/manager knowledgeable about client industry’ more highly than did auditors. This perhaps also reflects how CFOs and directors value an auditor who can talk their language.
Some of the findings in ACCA’s report are challenging for policy-makers. For example, the finding that ‘audit firm size’ is considered the most important indicator might explain why a small number of large firms dominate the market for public interest entity audit, but will be unwelcome to those who seek greater choice in that market. Similarly, CFOs’ and directors’ views of ‘tenure of audit partner’ indicate the inherent tension between auditor independence and auditor knowledge of the client. And there are risks that regulators will propose indicators that are easy to measure rather than those that are salient. For example, does ‘workload of engagement partner’ indicate that an audit partner with a light workload will dedicate more time to the audit? Or does a light workload indicate a lack of experience? If such metrics are measured and ranked among and between firms, it could reduce rather than increase audit quality.
In a recent discussion on LinkedIn, auditors offered their suggestions for what really indicates audit quality. One suggested the quality of the substantive analytic procedures and how well they demonstrate a deep understanding of the specific business, as well as the quality of systems work and how well the audit team has assessed that transactions are recorded completely and accurately. Another said it hinged on whether the audit team had applied a high degree of professional scepticism. I’m sure both are right, but none of these attributes is easily measured.
So this is the challenge of audit quality: what is measurable may not be relevant, and what is relevant may not be measurable. Regulators may know audit quality when they see it, but there’s no obvious shortcut for now.
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