PracticeAuditThree rules for quality audit

Three rules for quality audit

Our reporter wants the FRC to adopt three principles to shape the future of audit

The Financial Reporting Council paper on promoting audit quality provides a
sound analysis of the factors that can impact quality in the audit market.
Although we welcome the publication, its timing and how the results will be used
raise important questions.

On a positive note, the report provides a first step towards a widely agreed
definition of audit quality, against which audit firms can benchmark themselves
and be assessed by the market. It also helps the FRC to lead the international
debate – the UK system of regulation and governance could offer a model for many
other economies.

However, we question the FRC’s failure to indicate how the results of the
consultation will be used, considering current evidence pointing to general
confidence in UK capital markets and auditing. Our response asks the FRC to
apply three principles in assessing any changes.

First, to give primacy to the needs of share owners, who are the primary
users of audited financial information. Research from the International
Corporate Governance Network suggests that share owners feel they are rarely
consulted adequately on new rules purporting to protect their interests.

Second, it should recognise that the environment in which audit firms work
will affect whether there is an adequate pool of talent to perform quality
audits.

Good auditors want to use their professional judgement and experience;
excessive box ticking will cause young talent to abandon our profession,
jeopardising the future quality of auditing.

We are concerned that the FRC’s paper contains a number of apparently
unsubstantiated assertions: that the best staff are allocated to ‘the best
clients’, and that there is no on-the-job training for auditors.

One suggestion we have floated is for the FRC to encourage partners of
leading audit firms to pass on their fraud detection experiences to younger
professionals across all firms.

The third principle is to recognise that with many current share owner
concerns, while there may be links to audit quality, the underlying issue
relates to corporate reporting and not just auditing. The recent report on audit
reporting by the audit quality forum contains some good proposals for share
owners to receive better information on estimates, judgements, risks and
uncertainties inherent in financial statements, but these ideas will not come to
fruition through extra audit regulation alone.

We look forward to contributing to the debate on building on the UK’s solid
audit quality foundations.

Steve Maslin is head of external professional affairs at
Grant Thornton

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