In a recent article in the Irish Independent Stephen Kinsella (19th February) has questioned the role of audit and conduct of auditors in the financial crisis, as well as questioning a lack of public scrutiny to date on these issues. This is not the first time this issue has been raised, and no doubt will not be the last. There are further issues not identified in Mr Kinsella’s article but which are particularly relevant, though complex, relating to accounting rules around recognition of loan losses.
Chartered Accountants Ireland welcomes the debates on these issues. Confidence in statutory audit has been damaged – this has already been acknowledged the profession itself, regulators, and policy makers. And change is afoot.
There has long been a misconception and misunderstanding about the role of a statutory auditor – and this is repeated again in Mr Kinsella’s article. Auditors do not ‘clear’ any corporate entity as being ‘models of good health’, no more than they provide assurance for example, on the outputs of food processors being free from equine DNA. An audit provides no assurance on business models, strategies or risk appetites of banks or any other entity. There are other agencies, including State regulators, which oversee such matters.
Rather, the focus of an audit is narrower. Its primary purpose is to provide a level of comfort on the accuracy and fairness of the financial numbers produced annually in accordance with accounting rules and legal requirements. Depending on performance, those numbers will portray a healthy position, or on the other hand, one that is not so rosy. Regardless of what those numbers say, the auditor’s responsibility is to report his or her opinion on whether those accounts give a true and fair view of financial performance. Such performance may have been poor, but if the numbers and related disclosures fairly reflect that, then they give a true and fair view.
So the audit is not some form of ‘catch all’ assurance on an entity’s operational or financial health. This was acknowledged by Professor Peter Nyberg in his report on the Irish financial crisis.
In his conclusions, Nyberg has, however, like others, raised questions about the role and scope of audit. Policy makers, regulators and the auditing profession itself have been responding to these challenges. Recent changes introduced by the Financial Reporting Council will require mandatory audit tendering by listed entities. In addition, audit reports provided by auditors will soon have to contain much more company specific information relating to the conduct of that audit assignment and the critical judgements exercised by the Directors in preparing the accounts. Companies themselves will have to disclose more about their business model and risks.
At European level, further wide ranging proposals on auditor regulation will be finalised shortly. These include measures which will require auditors of public interest entities (‘PIEs’) to be regulated in a manner that is independent of the profession. Indeed, Chartered Accountants Ireland has been calling on Government to introduce such independent regulation for some time.
Such proposals have been the subject of numerous public consultations including by the Department of Jobs, Enterprise and Innovation and at two sessions of an Oireachtas Committee.
It is inaccurate to suggest that the role of audit and auditors has not come under scrutiny post financial crisis. Indeed, the Irish Auditing & Accounting Supervisory Authority continues to oversee the work currently being carried out by the Chartered Accountants Regulatory Board, which is reviewing the audits of covered institutions in the periods preceding the crisis.
An extract from the above article appeared in the Irish Independent on Thursday 28th February 2013
Director, Technical Policy
Chartered Accountants Ireland
Link to Irish Independent online article