Auditors: lessons from the future

For most in the audit profession, the last few years have been a time of
great transformation under the twin impact of new regulatory and reporting

Time is a great healer and over the next couple of years the profession will
come to terms with its new operating environment and the expectations that have
been imposed on it.

During this historic period, perhaps insufficient time has been devoted to
reflecting on the changes that have taken place in the profession over the
previous 30 years. Yes, the issue of the expectation gap has raised its head
again, and there has been a heightened awareness of the importance of the audit
focusing on the effectiveness of systems and controls. But how much quality
thought has been given to the broader issues which in part have caused the
profession to be pushed into a regulatory corner? If we are to do something to
enhance the profession’s relevance and sustainability, we need to analyse
carefully and understand the underlying symptoms which arguably allowed the
profession to lose touch with stakeholders.

Importantly, the impact of the last few years should have been the catalyst
for the audit profession to re-examine its value proposition and its role in
society in the 21st century. To date this has not occurred. We have not asked
two critical questions. Does society want more of the same and is the historic
value proposition still valid?

Time for reflection

Auditors are rightly or wrongly routinely criticised for sitting in the back
seat, looking in the rear view mirror. So the findings of a recent study
undertaken by research institute AccountAbility make interesting reading.
Entitled ‘What assures?’ the study interviewed 40 opinion formers, practitioners
and users of assurance from a wide range of organisations including companies,
the financial community, media and civil society organisations.

It focused on non-financial assurance, particularly in the field of social
and environmental performance, reviewing the different audiences seeking
assurance, the type of data they look for, and how assurance may need to change
in the future. Importantly, the findings provide some critical insights into the
challenges assurance providers will face. While the focus was on the
non-financial, it is perhaps the audit profession which needs to stop and
reflect the most.

So what lessons can be learnt by looking into the future? There are a number,
and each provides a challenge to established thinking and behaviour.

First, the study suggests there is a growing diversity of stakeholders who
are going to be demanding a higher level of assurance about the products and
practices of companies. This is against a background of negative perceptions
about business and a belief that in part this trust gap can be addressed by
companies producing better quality information, particularly non-financial
information, and engaging in much more effective stakeholder dialogue.

An out-front approach

Here the profession needs to embrace the holistic nature of corporate
reporting and recognise that it is a key part of a complex communication model,
the oil that lubricates a modern civil economy.

Furthermore, auditors need to ask the question about their role in the
assurance process. Should they be more engaged, more ‘out front’ and perhaps
even actively engaged with stakeholders who are seeking assurance? Do the days
of auditors living under the spectre of vexatious litigation and
disproportionate liability need to come to an end to enable them to engage more

Secondly, effective assurance appears to come from a combination of formal
and informal information. So the engagement practices and impact of the company
itself are possibly as important as any formal financial audit opinion. Can
formal assurance be linked with informal information flows, such as the views of
stakeholders, to provide an overall assurance product that is more meaningful to

Thirdly, those interviewed were not convinced that historic mechanisms for
providing financial assurance are adequate in the new areas of information that
are evolving. Increasingly stakeholders want the front end of the data chain
assured – statements and commitments, strategic plans and policies, key
performance indicators, compliance and reputation, rather than financial output

What they are interested in are predictors of future performance, not
accurate analysis of the past. In addition stakeholders want assurance that the
right and most important information is being reported, not a simple statement
that the information is compliant with some rule or regulation. To meet this
demand, future assurance methodologies will need to deliver opinions on the
relevance of information reported. The market also needs to recognise that
predicting the future is an art not a science and even with the best models and
assumptions people will get it wrong at least some of the time.

Next generation

Both these points lead to a sense that the next generation of auditors must
have an even greater understanding of business and be much more active in
advising companies on what critical business information needs reporting and how
accurate and reliable it is.

Providing assurance that is limited to technical accounting information will
fall well short of the mark.

And finally, assurance providers themselves need credibility, which can be
achieved through a combination of technical competence but more importantly by
demonstrating values and practices that are in tune with stakeholders’ concerns.
Don’t be surprised that if you haven’t spoken directly to a stakeholder, you
might be operating in a vacuum. Companies are learning that building trust
around social and environmental performance involves direct engagement with
trade unions and civil society groups campaigning on labour standards and
environmental issues. The auditing profession should take heed – the investment
community is just one group with which we need to engage.

It is fair to say that the profession has accepted much of the criticism
levelled at it and is working hard to address the concerns raised. It still
remains conservative, however, and some would argue resistant to change.
Perhaps, as this study indicates, now is the time for the profession to step up
to the plate, by recognising the incredibly important role it has to play in
meeting the needs and expectations of society in the 21st century.

Delivering on these expectations will not be easy and is unlikely to be
achieved by delivering more of the same. The world is moving on and so must the
audit profession.

David Phillips is corporate reporting partner at

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