The Future of Audit

Principles

Audit is only of use to users of financial information if it significantly enhances the creditability of that information.

Audit is a process of independent assurance that financial information is properly prepared under a clear framework.

Any form of audit or assurance, needs to be clear in scope to enable users to assess its use properly.

Audit and assurance reporting should be clear and unambiguous.

Different types of entity will require differing levels of assurance depending on their size and complexity, and on the multiplicity of users of their financial information.

The rules and principles governing audit and assurance should be comparable across nations.

Comment

The decline in the perceived value of audit is linked to mounting dissatisfaction with the financial reporting framework.

The Treasury Select Committee were fundamentally questioning the value of the statutory audit, not whether it was carried out effectively or not.  Large financial institutions, and a limited number of very large, complex businesses, might benefit from an assurance model that reported more widely on business risk.  At the same time there is a need to look again at the communications between auditors and regulators.

The same considerations should not necessarily apply to the vast majority of UK companies, whose businesses should be capable of being understood relatively easily by those using their financial statements for investment or other decision making.  The economic impact of a “one size fits all” approach to an enhanced audit would hinder UK competitiveness, with no discernible upside.

There could well be value in auditors reporting more formally on operating and financial reviews, corporate governance statements and other written material issued to shareholders of public companies.  This needs to be assessed and the form of reporting considered so that there are options short of “qualifying” to deal with nuances of emphasis that may mislead.

At the same time we should look to pay for any enhanced audit work by savings elsewhere.  Much audit work has little value:  Why audit each subsidiary of each sizeable company separately and could the audit exemption limits be lifted without undue risk to third parties, by way of example.

The key is that we strive for consensus between all interested parties as to what “quality” means in the context of an audit so that it can be acknowledged and demonstrated, or otherwise, by regulators, from a stable platform that is seen to be of benefit to users of financial information.