Auditors believe there is substantial value added during the audit process; but clients rarely support this belief.
Those are key findings from an Australian study on 'The future of audit' – reported to the UHY annual meeting in Auckland, New Zealand, by Joella Gould (pictured below), partner at UHY Haines Norton, Melbourne, Australia.
The perception of value in a product is a comparison between cost and the quality of the output delivered. Is this perception gap in the value of audits consistent with our experience?" asks Joella. "If so, how do we change this perception?
The Australian National Centre for Audit and Assurance Research survey team questioned participants in the audit market – auditors; clients; readers of financial reports; and professional and government bodies charged with oversight – and compared their responses.
Clients perceive auditors to be 'doing the right thing', according to the survey report; but concerns exist among clients that the amount of regulation and bureaucracy required is a distraction from the main objective of providing assurance on financial statements.
The issue of mandated partner rotation is one of the few issues on which there is agreement among stakeholders. "All agree on the principle of rotation," says Joella, "but the length of tenure must be balanced against the loss of knowledge."
The survey questions whether 'materiality' is communicated to the audit committee/board, and/or to the client's management. "Do they understand what materiality is?" she asks. "Should materiality be communicated in the audit opinion? Do clients appreciate the relationship between the materiality level; the amount of work performed and the cost of the audit?"
[Materiality is an auditing concept or convention relating to the importance/significance of an amount, transaction, or discrepancy. The objective of an audit of financial statements is to enable the auditor to express an opinion whether the financial statements are prepared, in all material respects, in conformity with an identified financial reporting framework such as Generally Accepted Accounting Principles. The assessment of what is material is a matter of professional judgment.]
And how useful is the audit opinion, asks Joella? Audit report wording is so standardised, she says, it may hide the degree of auditor judgement involved; it may ignore the diversity of its audience in terms of motivation and capacity for understanding; and it may use terms that can be misconstrued (such as 'material misstatement').
[An audit is designed to increase the possibility that a material misstatement is detected. A misstatement is defined as false or missing information, whether caused by fraud (including deliberate misstatement) or error. 'Material' is broadly defined as being large enough or important enough to cause stakeholders to alter their decisions.]
But what are the alternatives, she asks? What might audit reports look like in the future? This is an issue the International Auditing and Assurance Standards Board has identified for future review.
Any discussion about the future of the audit profession must recognise the diminishing pool of experienced professional auditors. Clients' expectations of auditors' business acumen is low, according to the survey, even though they differentiate between senior and junior auditors, yet clients identify accountants with an audit background as attractive candidates for employment.
And audit firms are not perceived as 'premium employers' – work for junior staff is viewed as less important than work for senior staff, yet experienced auditors understand the need for a strong grounding in basic skills.
"What skills should junior staff possess coming into the profession?" asks Joella. "How do we make the audit profession appealing to the younger generation? How do we retain good, young auditors?"
Most of these issues, she says, centre around communication. There are several opportunities to communicate more effectively during the audit process, and this is encouraged by the new Clarity Audit Standards.
Auditors, she says, need to communicate to clients and users the limitations of audit; the value of audit; and the breadth and depth of auditors' experience to increase clients' perceptions about the value an audit can offer their business. Each time we have made an effort to do this, the feedback we have received from clients has been overwhelmingly positive.
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