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IFIAR issues wake-up call on global audit quality

Firms must work harder on cross-border audit quality, the International Forum of Independent Audit Regulators (IFIAR) chair Lewis Ferguson warned yesterday at the launch of IFIAR's 2013 survey of inspections findings.

This is the second global survey conducted by IFIAR members, in which its 50 international regulators have found deficiencies in audit work of firms under their respective jurisdictions.

In particular, the survey revealed that firms did not obtain sufficient audit evidence to support their opinions. That happened in areas such as fair value measurement in the audits of public companies or valuation of investments in the audits of financial institutions.

Ferguson said the results were a "wake-up call" for firms and are consistent with the 2012 survey although IFIAR can't firmly conclude whether audit quality has improved or deteriorated as yet.

"Over a two year period it's very difficult to compare the data," Ferguson said. But according to him in future surveys, with a larger body of data representing a longer time period, IFIAR will be able to do that kind of analysis.

Root-cause analysis
At the survey launch, which followed IFIAR's annual plenary meeting in Washington, vice-chair Janine van Diggelen said the survey findings show that audit firms should take action to carry out root-cause analyses.

"A well performed root-cause analysis will provide the firms with a thorough understanding of the factors that underlie these findings, which also include governance, cultural and behavioural aspects," Van Diggelen said.

Examples of these cultural aspects, according to Ferguson, are the partners' workload or the policy reward within audit firm. In that sense Ferguson wondered if audit quality, although hard to measure, is being rewarded in firms. "These are questions regulators are starting to ask on a very granular level," he said.

On that note, Van Diggelen said that firms have started to understand that audit quality issues require something else than traditional responses. Van Diggelen called for the global leadership of international accountancy firms to give their support to the national leadership of their member firms.

"We think it deserves a global response from the global leadership of these firms. They have a role to play to stimulate root-analysis and improve audit quality," she said.

Nonetheless Ferguson said those in business have a sense that audit quality is improving, and putting the issue into context, he said auditors have been subjected to an "unprecedented level of detailed scrutiny" compared to other professions.

Asked by The Accountant if a higher level of transparency regarding the results of audit inspections performed by national regulators would improve audit quality, Ferguson said:

"My personal view is that it would. I'm a great believer that sunshine is the best disinfectant, to quote US Supreme Court justice Louis Brandeis. The more transparency there is the more effective our work would be."

Van Diggelen agreed and noted that audit committees have also an important role to play, for instance rewarding audit quality and not just pricing. To that purpose, a deeper level of engagement between regulators and audit committees, properly sharing the results of audit inspections, would be a step in the right direction for Van Diggelen.

"Of course there are confidentiality arrangements and regulators operate within a legal framework but it would be a great way forward to have more transparency regarding the outcomes of our inspection work," Van Diggelen.

Non-audit services
IFIAR's survey launch was preceded by the forum's plenary meeting hosted this year by the Public Company Oversight Board, in which key topics were discussed.

Among these topics was the business model of audit firms in light of the increasing fee income they earn from non-audit services. According to Ferguson this is a source of concern for regulators around the world.

Ferguson said evidences are very clear that the audit practices of the big networks are growing much more slowly than the other practices, particularly advisory practices. According to him this is a very complex issue which derives from the fact that audit itself is changing.

As the use data analytics become more important in the audit process, Ferguson said, firms need to acquire new skills which are not in the natural skill set of the auditor. Therefore firms are growing a different part of their businesses.

"On the other hand it raises serious concerns about the different level of profitability, different rates of growth; and to what extent audit quality suffers," he said.

Van Diggelen agreed that the risk of this changing model is a concern for IFIAR members. A better understanding on the dynamics of firms' business models and the innovations in which firms are working on is needed, she added.

Ferguson concluded: "If the business model is threatening audit quality you would expect the regulatory community around the world taking action but before passing regulation the issue needs to be understood."

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