Auditors: great expectations

Auditors: great expectations

The role of the auditor is grossly misunderstood

Whenever there is a financial scandal it doesn’t take long for politicians to
look for scapegoats. Certain commentators have already pointed the finger at
auditors.

The auditor is an easy target, but it is clear that their role is not fully
understood by their accusers.
This is not a defence of auditors. But it is clear, to me at least, that a chasm
exists between what the profession is actually paid to do and what wider
stakeholders expect.

Auditors are tasked with issuing an opinion to the shareholders on the truth
and fairness of an entity’s financial statements.

Note that the opinion is directed solely at the owners of the business, not
other interested parties. Note also that the audit does not guarantee the health
of that business nor vindicate the business model being used by the directors ­
common misconceptions regularly used as sticks to beat the auditor with.

While hindsight would be a very useful audit tool, it is not currently
available. Auditors must assess the evidence available at the date of signing in
order to arrive at that opinion.

As business has become more complex, with the increasing use of derivatives
to provide meaningful information, these have been required to be valued at
their fair values ­ inherently more subjective than historic cost ­ especially
where there is no liquid market.

The downside is that the use of more current information means that
significant fluctuations in value are a possibility, even within a short period
of time. Such fluctuations are no more the fault of the auditors than the
current drop in property prices is the fault of surveyors.

What can be done to remove the expectation gap that exists? Efforts have been
made over the years to provide greater detail in audit reports of the work
undertaken by the auditor and their responsibilities. It is not obvious that
such steps have improved matters.

Indeed, most respondents to the recent APB consultation examining the wording
of auditors’ reports favoured minimising the length of such reports and removing
much of the text relating to auditors responsibilities. This evidence suggests
that most users of audit reports think they understand the auditor’s role.

So where does that leave us with those making ill-informed comments? Perhaps
this is a perception gap which cannot be bridged.

David Wood is executive director, technical policy, at
ICAS

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