Audit And Assurance: Provision Of Audit And Advisory Services

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In past decades, audit quality has undoubtedly been under question. By looking back at series of past events, it is evident that public confidence has deteriorated. The emphasis to enhance financial reports’ credibility and quality first stems from the occurrence of the global financial crisis [BerryDunn 2019], which accused auditors of not duly performing their duties. According to regulators, auditors have failed to apply standards imposed by the Public Company Accounting Oversight Board (PCAOB) that resulted in unreliable representation of companies’ financial and income statements.[Shahzad et al. 2017] Moreover, the collapses of ‘too big to fail’ financial institutions further questions the lack of auditors’ duties in preventing the occurrence of such financial distress. As outlined by the Auditing Practice Board 2004, high leverage ratio is an indication that a company may face financial distress. However, many prominent institutions before the financial crisis breakout have displayed visible risks and resulted in filing for bankruptcy after receiving unqualified audit reports. [Sikka 2009] Such negligence of auditors despite being aware of the risk indicators of a company’s financial health have scrutinised the audit profession internationally.

Despite implementing improvement measures since 2009, audit quality is still evidently declining given the rise of recent high-profile cases: Carillion and BHS. [The Guardian 2019] The Carillion case, as described by the parliament for being “reckless, hubris and greedy” is an example that portrays the failure of a once reliable system. [The Guardian 2018] KPMG, upon investigation has been found to be complicit in approving misrepresented figures and has failed to identify concerns associated with £150m of reported profits where are later proven to be delusive. In the internal audit aspect, Deloitte has also neglected in identifying failures within financial controls and risk assessments. The lack of exercising professional skepticism in applying judgement for accounting provision has resulted in the greatest insolvency in the history of UK, causing loss of employment and pensions. [CFO 2018] Likewise, BHS has resulted in heavy criticisms towards PwC auditors for being complacent in delivering false and misleading statements.

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With the emergence of such scandals, how could the public, especially investors, put their faith in a virtuous system that has already been broken? To regain public confidence, changes are more vital now than ever before. The following section outlines several measures, which aim to enhance audit quality and in turn, reimburse confidence within the audit sector.

Closing the expectation gap

One may argue that the existence of expectation gaps is one of the main reasons why audit quality is scrutinised. While an auditor’s primary responsibility is not to detect fraud, the public perception states otherwise. [Ojo 2006] To tackle this issue, there is a greater need for effectual regulations and increased transparency to manage the expectations of audit clients. To increase clarity about audit roles, communication and education is vital for the public to understand what they perceive audit offerings to be versus what can an audit feasibly deliver. [GAA 2017]

Segregating the provision of audit and advisory services

Post-review of the Carillion scandal, all the Big Fours have played a role in providing either audit or consulting services, bringing increased attention to the rise of potential conflicts of interests. When a firm that provides both audit and consultancy services questions any issues during an audit investigation (such as revenue recognition or assets/profits appropriation), auditors may be tempted to overlook such details by prioritising the income generated instead of following good governance standards. [CFO 2018] Therefore, conflict of interests need to be minimised by establishing barriers to relationship development and ensuring that information accumulated during the audit process does not spillover to non-audit services. This way, stakeholders could confidently rely on a company’s financial reports, knowing that auditor’s judgement has not been compromised through selecting auditors based on job performance rather than on cultural fit and likeness. Although this measure would deter engagements that pose conflict of interest threats, it does not combat the issue of minimizing quality control failures. [FT 2018]

Strengthening auditors’ independence

As argued by the CMA, investors need to increase their engagement and be held accountable when selecting their audit firms. Moreover, further regulations with regards to appointing auditors needs to be imposed as management decision may negatively influence how audit process is monitored, resulting in reduced quality. Following the Enron scandal, non-audit fees should be disclosed and controlled within restrictions placed under the Sarbanes-Oxley Act to restore public confidence. [Chu, Hsu 2018] Additionally, audit committee could also play more effective roles to protector auditor’s independence by actively getting involved in disputes resolutions when it comes to disclosure issues. [Cohen et al. 2012]

Lowering barriers to entry

The audit market is largely dominated by the Big Fours, which questions the competitive nature within the market as to being sufficiently adequate or not. Employed by the FRC, a lower barrier of entry is a feasible measure to encourage increased choices and innovation, and is noted by Kallapur et al. (2010) to be positively associated with audit quality [Eldaly and Abdel-Kader, 2018]. The two main types of barriers of entry for mid-sized firms are financial and risk barriers. [Oxera 2006] A key risk firms face is the unlimited liability to clients. Whilst the UK Companies Act 2006 allows limited liability, approval has to be sought from clients’ shareholders, who often disagrees, resulting in the absence of major companies in limited liability agreements. Limited liability could be implemented legally in the UK, as in Germany, to increase audit market saturation [Weber et al., 2008]. Furthermore, existing financial barriers are mainly focused on large resources required to attract international clients. This is aggravated by the UK Companies Act, which restricts the capacity of existing firms to expand their financial resources. As changes in ownership rules may affect audit independence, such regulations could be loosened to increase firms’ entry into the audit market [Eldaly and Abdel-Kader, 2018].

Embedding culture within audit firms

Following the Audit Culture Thematic Review reported by the FRC 2018, auditing is still widely examined through human judgements and decisions. [ICAEW 2002]. Mccance (2018) highlights the importance of having a prominent and cohesive cultural design to embed specific audit behaviours and values such as integrity, objectivity, independence and professional skepticism. FRC (2018) further reports comparably low awareness levels regarding firm-specific values to generic values, thus identifying room for improvement for individual firms to advocate their own values within the entity. Salih et al. (2016) further emphasises on the importance of having quality assurance review programs not only to improve audit processes and minimise errors, but also to strengthen the profession’s reputation in the public’s eyes. Such organisational framework assures the system is implemented in a structured and effective manner. [FRC 2018] Key areas underpinning a strong audit culture within a firm includes the consistent implementation of performance management and reward systems, monitoring of intangible behaviour and culture promoting transparency, alongside cascading a strong tone from firm’s leadership team.


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