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April 30, 2014

Human factor makes audit quality imperfect

A panel of experts representing regulators, auditors, preparers and users of financial statements discussed yesterday in London how the assurance function can be improved.

At a roundtable hosted by the Institute of Chartered Accountants in England and Wales and moderated by the BBC financial journalist Stephanie McGovern, experts debated extensively about the main issues impacting audit quality.

When McGovern asked one of the panellists, PwC UK partner Andrew Ratcliffe, why the profession has not reached top audit quality, he said: "Because it is a human endeavour that involves judgement." And expressed doubts that 100% accuracy on audit could be ever reached.

Using the analogy of airline companies McGovern challenged Ratcliffe’s answer, arguing that some companies have never had a plane crash due to human error.

"I don’t think any airline would say they give you 100% guarantee that the plane wouldn’t crash. They would do everything possible to make sure they don’t crash," Ratcliffe said.

Taking questions from the public, BDO UK audit partner James Roberts pointed out that the audit version of a plane crash would be an auditor’s wrong opinion. "I’d be interested to hear from panel members how often they actually see wrong opinions," he said.

In that respect, the UK Financial Reporting Council (FRC) executive director of governance, codes and standards Melanie McLaren said the audit in the UK is "generally good" but not "universally good".

McLaren added that investors would like to have more confidence in audit. "Audit quality does need ongoing attention and the FRC have already taken steps to create that environment where the reporting regime is fit for purpose," she said.

Investors’ concernsFrom the investor’s perspective Investment Management Association director of corporate governance and reporting Liz Murrall said the investor community has still concerns about audit quality, although some progress has been made.

"We don’t have information about the product and the audit process. But we’ve seen some changes introduced, bringing more transparency," Murall said.

She added: "That’s very welcome because it gives investors a hook to challenge management about the judgements and decision they have made in the accounts, to have better dialogue with audit committees. And that could help to build confidence between investors and companies."

Ratcliffe also said that historically the audit profession has not been good at explaining what it does. In that sense, he said the profession supports the proposals aimed at enriching the way auditors report.

"There is a lot of value that can come out of that. The current way we audit is fundamentally about giving an opinion on compliance against certain criteria. But the way reporting is going it is about giving much more richness," he said.

Ratcliffe said that at some point auditors should move beyond financial statements and give qualitative commentary about non-financial information too.

"That involves a change in the skills set for the next generation," he said.

Related link

The Institute of Chartered Accountant in England and Wales

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