Creating a vibrant audit profession

Conall O’Halloran identifies 10 ways the audit profession must up its game to remain relevant and continue to attract the brightest and best talent.

It may not surprise you that I am a strong believer in the value of audit and from my perspective, both as Head of Audit in KPMG and, until recently, the Chairman of the Institute’s Representational and Technical Policy Main Committee, I believe it has a very strong future. However, I also recognise that we need to work harder to demonstrate the relevance of audit and that many stakeholders have a role to play in ensuring the continued vibrancy and attractiveness of audit.

I also think it’s fair to say that over the last short number of years, the profession has recognised and faced up to many of these challenges and has shown itself capable of responding and innovating to meet stakeholder expectations. In this article I will set out 10 specific areas where the profession has made progress in demonstrating its relevance, but must do a lot more. These are areas we must address to ensure that we continue to recruit the brightest graduates and retain them whether in practice in the delivery of high-quality audit work or alternatively, in industry where there remains enormous demand for Chartered Accountants with the analytical skills and sceptical approach that come through an audit training.

1. Extended auditor reporting

It doesn’t seem like that long ago since the profession was resisting challenges from investors to the effect that an audit opinion was boilerplate, binary and of little use to investors or society. In fact, we are now heading into our third year of extended auditor reporting where for larger public companies there is no longer a ‘standard audit opinion’. Rather, auditors now specifically call out key audit matters in their audit opinion, describing their response to the risk of material misstatement and what specific audit procedures and judgements were exercised. Audit opinions also talk about their application of materiality and the percentages of the group’s revenues and total assets that are covered by their procedures.

The specificity and granularity of these disclosures have been largely welcomed by users of accounts. The investor community in particular has welcomed the enthusiasm with which the profession has embraced this type of reporting, which has contributed to a better understanding of the areas of key judgement exercised both by directors and auditors. While this development has been limited thus far to Ireland and the UK, other markets such as the US have looked on with interest and it will be interesting to see if they embrace a similar type of reporting in the not-so-distant future.

It is also worth noting that recent European Union requirements will broaden the scope of extended reporting to many other companies from 2017 onwards. This is a notable demonstration of the profession’s ability to respond to challenge in a constructive way, leading from the front responding to such criticism and showing our desire to demonstrate the real value in, and relevance of, audit.

2. Other forms of assurance

In many respects, we often undersell our core skills as auditors by limiting our mindset to being able to report only on a true and fair basis in accordance with auditing standards and company law. In fact, the core competencies that auditors have developed are capable of being deployed in numerous situations and we have seen a significant uptake in these services.

Some of these assurance options are now required by regulators, most particularly in financial services where, for example, the Central Bank of Ireland now requires auditors to provide assurance on a broad range of areas outside the scope of pure financial audit. This covers areas such as internal governance, controls over client assets, and cybersecurity. And since 31 December 2016, certain auditors of insurance companies are required to report to the Central Bank on aspects of the preparation of a regulatory balance sheet in accordance with Solvency II requirements.

More locally, one of the recommendations coming out of the Oireachtas Banking Inquiry was that auditors provide some level of assurance on banks’ returns to the Central Bank, as we have done for insurance companies for many years. The scope of these types of assurance reports is not limited to banks and insurance companies alone; many corporates, and indeed audit committees, now see merit in asking their external auditors to provide assurance on a range of areas beyond statutory audit.

3. Driving better business reporting

It is perhaps an unfortunate consequence of the drive to a more consistent set of global accounting standards, which IFRS is, that the annual report has become more of a compliance document rather than a communications tool. As a consequence, we all too often see a divergence between the ‘front piece’ of the annual report – which is sometimes a little too upbeat and optimistic – and the ‘back section’, which can run to hundreds of pages of detailed disclosures, largely driven by International Financial Reporting Standards (IFRS) and incomprehensible to many.

The profession needs to play a greater role in creating a stronger connection between the front piece and the back section so that readers can link the company’s business strategy to its ultimate performance for the year. There are a number of global initiatives already under way, such as integrated reporting, while concepts such as ‘fair, balanced and understandable’ are being promoted by the Financial Reporting Council (FRC) to address these concerns.

It nonetheless remains the case that a significant amount of work needs to be done in relation to most annual reports to make them more intelligible, internally consistent and ultimately to provide a better account for the directors’ stewardship of their shareholders’ monies. Auditors are uniquely positioned to drive the necessary improvements in this area as there are now increased expectations to ensure the entire financial report is consistent.

4. Influencing standard setters

We sometimes take for granted the significant benefits that have accrued globally as a result of the almost widespread adoption of IFRS since 2005. For large and listed companies, we now have one common language in which they all report and against which investors can analyse companies’ performance using common measures and standards. There is no doubt, however, that complying with IFRS brings with it a level of complexity that can be quite demanding and requires significant in-house investment in accounting skills. The continuous flow of new standards, such as the ones currently in train on financial instruments, revenue and leases, are necessary to respond to the way business itself continues to change and evolve.

As a profession, we need to be very careful to respect the fact that for many small and medium-sized enterprises, this level of complexity intended for IFRS is neither appropriate nor warranted. I find it a little depressing when talking to business owners who dismiss financial statements as irrelevant because “they don’t make sense anymore”. In Ireland and the UK, we have a relatively straightforward alternative in FRS 102, which is our replacement for old Irish and UK GAAP. As a profession, we need to be strong in supporting the application of FRS 102 and also, working with standard setters to resist any temptation that there may be among regulators, standard setters or others to allow some of the complexity in IFRS to creep into FRS 102. Sometimes I think we often lose sight of the users of financial statements and, as auditors, we retain the overarching obligation to ensure the accounts do indeed give a true and fair view.

5. Supporting independent audit regulation

In June 2016, oversight of the larger accounting and auditing firms in Ireland moved from the Chartered Accountants Regulatory Board (CARB) to the Irish Auditing and Accounting Supervisory Authority (IAASA). Anyone who has had experience of the previous regulatory regime would argue that it was robust and challenging, and indeed it was. In reality, however, I do not believe that the public perception of the independence of CARB was sufficiently strong.

For the auditing profession to remain relevant, it is essential that, quite simply, the public trusts us. The perception of strong, independent oversight is a core pillar of that and IAASA’s performance as a competent and independent but fair audit regulator will be critical in enhancing public confidence in the audit profession. 

6. Ethical behaviours at our core

Much has been written in recent years about independence, largely based on misinformation or recycled, out-of-date data relating to auditors providing ‘consultancy services’ and thereby raising questions about auditors’ independence. In my experience, auditors are fiercely independent and understandably become very defensive when this core attribute of our professionalism is inappropriately challenged. We now have any number of safeguards in place to ensure the independence of the auditor is not just protected, but that it is seen to be protected. What is more fundamental yet has received little focus, however, is the area of ethics and integrity. This is, put simply, doing the “hard, right thing”. For many years, as a nation we relied on the Church and other players to dictate a moral code for us, and for our schools to instil it in us. In recent generations, in tandem with the declining influence of the Church, we have not properly armed our young accountants with the tools to analyse what is right and what is wrong.

When one looks at the curricula, both in universities and indeed through the Institute’s professional exams, the extent to which we have the opportunity to develop this core aspect of students’ analytical capability is limited. Chartered Accountants need to be, and need to be seen to be, the people to turn to for the ‘right’ answer. We need to find more time within the Institute’s professional exam curriculum for aspects of philosophy and morality, which will help us develop our own personal set of guiding principles. This will in turn allow us to make those hard, right decisions rather than simply comply with a letter of an accounting, independence or ethical standard.

7. Retaining our brightest in the profession

When one looks at the calibre of the intake into the profession each year, it should be a source of great pride for all of us. The profession is now largely a graduate profession and despite competition from MBA degrees and other professional qualifications, Chartered Accountancy remains the preeminent business qualification in Ireland, the UK and many other parts of the world. This certainly remains the case in Ireland where student intake is again growing at a rate that we have not seen for many years, with the 2016 intake peaking at 2,500 . What is less apparent, however, is the extent to which these very bright young professionals want to stay in practice and cultivate a career in auditing, or whether they see their Chartered Accountant qualification as a route to business.

I do believe that we have been successful in retaining many of our brightest in practice and this has been central to the development of the high-quality audit profession we currently enjoy. We have also seen, particularly in recent years as some global independent regulators seek to make their mark, more very bright professionals leave the profession as they choose a career without such a regulatory burden. I fully respect and appreciate that the role of independent regulators is primarily to drive audit quality and they have a statutory obligation to do that. However, large auditing firms also have a common interest in driving audit quality.

Regulation and penalties will only work to a point. Regulators need to recognise that one sure way of adversely impacting on audit quality is driving the best out of the profession. Conversely, by working in a proportionate way, we can work together to drive a common goal of audit quality and ensure that we retain those who are more likely to make this difference in practice rather than lose them to other areas of business.

8. The increased role of technology

Time and again one hears from experienced auditors that, in many respects, the work we do is not hugely dissimilar to that which we were doing 20-30 years ago. Yes, all of the auditing firms now have electronically enabled audit methodologies, audit work-papers are largely electronic, and we have widespread use of software applications such as Excel and Caseware across the audit. Some firms have also developed bespoke IT-based routines to significantly enhance the risk-assessment phase of the audit, identifying outliers for further testing and investigation. These changes seem very minor compared to the developments in computing power and technology our clients have invested in. It is hard to think that there are many of our clients that would still be in business today if they had not embraced technology the way most have done. Yet as we look forward, auditors are now in a position to deploy the power of technology through the use of data analysis tools in our audit approach. Each of the big global audit firms now has, to a greater or lesser extent, developed the technology to take entire downloads of client data and apply much more powerful data analysis tools than previously imaginable.

Computing power should allow the auditing profession to consider a far higher level of assurance that would be given on the accuracy and integrity of elements of financial statements. For the profession to remain relevant, deployment of these data and analytics tools will need to become integral to the audit. The firm’s ability to deploy them must also be supported by, rather than restricted by, auditing standards which were drafted and written in a different time.

Ultimately, audit committees and finance directors will begin to demand this higher level of assurance from their external auditors. The profession needs to be ready to deliver.

9. IT in our training curriculum

We should take great pride in the nature of the accounting, auditing and business training delivered to students in preparation for their professional exams. The nature of both training delivery and exams has evolved in recent years to ensure we are turning out qualified Chartered Accountants who are well-armed for the challenges of the business world, whether in practice or in business.

However, our curriculum has not kept abreast of developments in IT capability and indeed, the expectations of employers when recruiting Chartered Accountants. I am not proposing wholesale IT training for young Chartered Accountants, but I do believe that we need a much deeper focus on developing the abilities of young Chartered Accountants to deploy powerful software tools to assist them in analysis and manipulation of data.

We are all aware of the extent to which business decisions are now primarily data-driven and for our young Chartered Accountants to remain relevant, their ability to analyse and manipulate large amounts of data is a skill that is now demanded by all employers. We need to find space in our training curriculum to greatly increase our students’ competence and comfort levels in this area.

10. Maintaining a global outlook

In reflecting on developments over the last few decades, we are almost at a place in the world where we have significant commonality and consistency between accounting, auditing, ethical and reporting standards in all major markets. The bigger auditing firms are also much more globally connected, with common standards driven rigorously by firms’ leadership teams and also, demanded by audit regulators. We must therefore maintain a more global outlook than ever, and ensure that our students and professionals in practice see themselves as players on a global stage, not just in Ireland and the UK. This will bring both opportunities and challenges.

The audit world we operate in will continue to operate to a global, uniform heartbeat. In Ireland, we have always had a global outlook but with global developments in the profession, coupled with the challenges from Brexit, it is more important now than ever before that we maintain this mindset to ensure our future relevance.

Conclusion

Over the last few years, we have seen many significant changes in the audit market and some would fairly observe that these were long overdue. The changes demonstrate that the profession does recognise the societal role we play and the very high value placed by the public on what we do. We have shown an openness and willingness to embrace change and develop more open and transparent relationships with all stakeholders. We also need to continue to do a lot more, from student training to development of IT-enabled audit approaches, to ensure we have a dynamic and vibrant profession that is capable of delivering the high-quality audit service that both society and the markets are entitled to expect.

Conall O'Halloran is Head of Audit at KPMG Ireland.