A challenge to the future of audit

“A worrying lack of scepticism.” That’s the description from the UK’s
biggest financial regulators of auditors working with banks.

The FSA is now proposing it should have more powers (it ironically calls them
“incentives”) to deal with auditors who fail to behave appropriately. It is
concerned that auditors do not challenge management and have failed to pay
attention to “indicators of management bias” and have failed to communicate
properly with the regulators at the FSA.

Published in a discussion paper out last week, the criticisms contained in
that repor t are probably the most significant of the audit profession in the UK
of the last ten years. No longer can the view that auditors had a good crisis
stand. The Financial Services Authority (FSA) and the Financial Repor ting
Council (FRC) have shot it down.

But contrast the FSA comments with those in this week’s issue of Ian Powell,
chairman of PwC.

He writes that the audit model can be improved but says the fundamental
problem is about the scope of the audit. It would be of no surprise if those at
the FSA behind the recent repor t saw that self criticism as much too narrow and
failing to deal with behaviour that concerns the regulators.

The problem for auditors is one of perception and, in turn, the reality it
creates. The FSA’s star ting point is the belief that there is a lack of
scepticism and its asser tion will go a long way among many interest groups –
shareholders, business par tners, policy makers – in determining how they
perceive auditors. In many senses auditors’ reputations are now on the line. As
much as they may claim their work is of the highest standard there will always
be that FSA paper out there which questions their ability to bring scepticism to
bear in their work.

And this goes to the hear t of what it is to be an auditor, not just the
scope of an audit. The FSA’s remarks will run deep. The question is what will
the profession do now?
In some senses, if it continues talking just about the “scope” of auditing it
will be denying the FSA’s criticism.

It could also lead to a failure to deal with the regulators’ scepticism
claim. This could be dangerous for auditors who already accept that something
has to change in audit. It could be interpreted as a failure to come to terms
with much deeper issues about the culture and mindset of the profession.

The FSA’s discussion paper is not just about the audit of banks, it is a
challenge to the future of audit itself.