The audit profession is at a turning point, facing shifting demands, opposition to the status quo, and potential regulatory upheaval ahead. It has three challenges on its hands:
• How does it close the ‘expectation gap’?
• How does it deal with an accounting framework which is inherently unreliable?
• How does it resolve market structure concerns?
For better or worse, the profession itself is not master of its own destiny in any of these debates, and to many the contributions it does make are seen as simultaneously self serving and divisive. Should it keep quiet and wait for international regulators and legislators to come up with answers that it will have to implement?
I would answer no.
It’s a time to be brave and embrace change. The profession needs to be at the forefront, if only to retain its creditability and that of practicing accountants and auditors. Never has the need for reassurance around risk been brought into sharper focus than in the wake of the failure of so many financial institutions. And audit’s importance in oiling the wheels of the capital markets and wider economy is crystallised by investors’ reliance on auditors’ work to inform their decision-making.
But this ‘expectation gap’ has been with us for thirty years. We have never effectively dealt with it, but tried to shield ourselves from it through occasional outreach to the investment community. When companies fail, and money is lost, fingers inevitably point at auditors and talk of an expectation gap then falls on rather deaf ears. The world has changed greatly and the way companies operate and communicate with stakeholders has become more complex and takes place in real time. Our fundamental role as auditors is to give reassurance to capital markets that company communications can be trusted. Until we engage, from first principles, with stakeholders and not just audit committees and find out what they really want from the assurance we give, we risk becoming increasingly less relevant to that role - which is all that ultimately justifies us.
Part of this issue is the question of what we report on. At the moment our work is focussed on a very big book that few people read, with much audit effort going into minutiae. The contents of that book are largely determined by an accounting framework about which almost every company financial officer or client facing auditor I meet has severe misgivings. Whilst this will dismay some, a debate is needed. In the long run, there will be little thanks for a system that eschews reliability and prudence in a bid for relevance, particularly in the context of a bleak economic background.
Privately, most believe market structure has to change for the good of the profession and for public good more generally. The changes needed – and being discussed at EU level and by the UK’s Competition Commission - aren’t seismic, but the dangers of schism in the profession might be. Competing claims over ownership of quality and ambition do not make us look clever in the eyes of the outside world.
So what is to be done? Open debate on the major issues would be a start, and it does appear to be emerging. The Audit Quality Forum is establishing a ‘lab’ – which implies basic and fundamental thinking. The debate on IFRS has begun to take shape in the letters pages of newspapers. The Competition Commission will report this year. However, we don’t have all the time in the world and we need, as a profession, to take the lead, and now.