Why the audit will change

The Council of the International Federation of Accountants (IFAC) recently released proposed revised independence rules for the world’s accountants which highlighted factors that could threaten reporting accountants’ independence and safeguards to prevent such a breach. IFAC is recognising that accountants are constantly introducing new services and business practices, some of which create new risks to independence.

While IFAC is asking for comments on independence rules, in a few days, the US Panel on Audit Effectiveness is holding public hearings on the way independent audits of financial statements of publicly traded companies are performed.

Set up at SEC chairman Arthur Levitt’s request, the panel put forward its view on how audit should change.

This panel was not designed to bash the auditor. Although it concluded the model underpinning financial statement audits is ‘generally appropriate’, it was in need of ‘updating, enhancing and implementing more consistently’.

The panel is worried that while US audit standards may have got better, the big firms have reduced the scope of their audits and level of testing.

Firms have moved towards risk assessment and analytical review procedures and away from ticking and bashing.

The problem with this switch in audit approach is that the panel believes the auditing profession has not kept pace with a fast-changing business environment and is not vigorously addressing issues such as fraudulent financial reporting.

To address these problems the panel has made a host of recommendations, including the idea that auditors should perform ‘forensic-type ‘procedures on every audit to increase the likelihood of detecting material financial statement fraud.

It wants the US Auditing Standards Board to make auditing and quality control standards more specific and definitive. At the same time, the panel wants audit firms to put more emphasis on the performance of high quality audits, performance evaluations and training. The hearings taking place in the next few days will debate the problems and recommended solutions.

UK auditors could argue we have had our debate over independence and standards in the 80s and 90s and in many ways are among the best in the world. But when the regulators of the world’ s biggest capital markets start asking auditors to change what they do you can be sure sooner or later those changes will reach the UK.

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