The UK, as the land lies
It feels like a moment of great uncertainty.
Just as efforts to reform and modernise the auditing process move into full swing, unforeseen consequences and other factors are creating challenges for auditors- to the concern of companies and investors that rely on quality audits.
A broad set of voices from academia, accountancy firms and institutes spoken to agree the audit process needed changing. Financial scandals in the UK including the collapse of retailer BHSand the insolvency of outsourcing giant Carillion, paved the way for a replacement to the discredited regulator the Financial Reporting Council (FRC).
The King’s Speech in July provided in the Draft Audit Reform and Corporate Governance Bill legislation to create re-invigorated regulator ARGA (the Audit, Reporting and Governance Authority).
Three heavyweight reviews recommended ARGA should have powers to investigate and impose meaningful sanctions, while strengthening the transparency and integrity of the UK’s corporate governance, financial reporting and audit.
Accountancy body ICAEW warmed to draft reforms, saying they provided the “wider remit professional bodies have called for” while the Investment Association said putting ARGA on a statutory footing will provide a boost to trust, transparency and accountability.
But proposals, set out in a government consultation, to require all UK company directors to assess and report annually on the effectiveness of their internal controls and financial reporting procedures were diluted following intense lobbying from the corporate sector.
While there may have been some differences of opinion over direction, the various parties are on board, even if the Institute of Directors warned about “the devil in the detail” and a need for government to consult with business.
Battle for America’s audit future
Over the pond, efforts to drive reform have fallen foul of parties who say the process has been driven through too quickly and is not taking on views of the corporate and accounting groups.
The US Chamber of Commerce, expressing concerns of the Center of Audit Quality (CAQ), an affiliate of accounting bodyAICPA, threatened the Securities and Exchange Commission (SEC) with a lawsuit if it approves the Public Company Accounting Oversight Board’s (PCAOB) new quality control standard.
At the same time as the process of reform continues, growing concerns around audit quality are taking its toll on firms, especially in the US. Accounting giant EY suffered a net loss of 63clients between January 2023 and August 2024, costing the firm $215m in audit fees, as it sought to enhance the quality if its auditing amid increasing scrutiny from regulators. PwC LLP recently pledged a series of reforms aimed at improving accountability of top leaders for audit failures.
BDO, which has shed a quarter if its public company client list, is undertaking a review of its approach after two thirds of its audits picked for inspection fell short of US standards. Larger rival KPMG LLP undertook similar changes after it admitted to trying to cheat on its PCAOB inspections and found staff had relied on shared answers to complete internal training tests.
The result of what the accounting profession perceives to be an onslaught of rule-making with greater pressure to comply with standards, is audit firms expecting to do more work in less time. Otherwise, extra costs would need to be passed on to clients.
X-head: Is tech-enabled the future of audit?
Help is at hand with the availability of disruptive technologies such as AI (artificial intelligence) and quantum computing, offering greater efficiencies for the audit process.
Many practitioners say they are happy with the benefits provided by tech in a world of finite resources, whilst privately harbouring concerns such as AI leaving such a big trail of documentation posing data management risks.
More broadly, many say at the core of effective auditing there is still the requirement for professional scepticism and judgment. Their argument is if there's too much reliance on technology, if too much data is being generated, does anybody have the time or expertise to analyse it? And does it dilute the auditor's professional scepticism, which many would argue is the strongest safeguard against audit failure?
Technology unlocks hereto unseen possibilities, increasing the scope of work, but the challenge to be addressed is how this overload of data can be transformed into something that adds value for audit clients and investors.
The approach that many firms are seeking is a blend of technological ability and human know-how, through augmentation rather than replacement- in which the auditor will be just as professionally sceptical but will have more support from machines to help save time at the lower end.
Even then, firms may still find themselves in a double bind because the more they push that approach, the more junior auditors are deprived of learning the basics of audit through grunt work. And that grunt work, many studies have shown, is essential for developing an effective mindset and developing a feel for whether certain transactions are a bit suspicious, and whether that squares with knowledge of the client.
If auditors are automatically undertaking higher level analysis, at the expense of building up that skillset over a slow, painstaking, albeit sometimes quite boring period of training, they're going to be missing that. The accounting firms have cottoned on to this, but they say they don't have a solution for yet, as they are simultaneously facing staff shortages.
They say it makes good sense for them to be able to find a formula where efficiency does not come at the price of professional rigour- important for corporates to be run well and investors to invest confidently in them.
We may have moved away from a time when audit involved walking around a business, asking straight questions and getting straight answers. But we are not in age when audit is purely driven by technology. A worrying version was witnessed during the period of Covid when audit work was all done remotely.
In the post-Covid era the future of audit lies in an effective balancing act of human and tech capability.
