A new dawn for audit and assurance?

The audit profession’s stakeholders come from diverse horizons such as large entities (quoted or not), small and medium-sized entities and public-sector entities where auditors have to engage with, for instance, management, those charged with governance, investors, shareholders, standard setters, and regulators. The auditor’s response to these stakeholders’ diverse needs should be balanced and adapted. The profession’s engagement should, for instance, not be limited to regulators as this could reduce the perception of other market players’ needs and the grasp of the broader

public interest.

Audit was historically performed to serve shareholders. With growing interest from diverse stakeholders and enhanced public auditor reporting, FEE foresees that the focus of audit will centre more and more on delivering qualitative and insightful information to investors as well as to a broader array of stakeholders and ultimately, to the public at large. With this in mind, through its recent publication FEE attempts to explore ways to respond to stakeholders’ evolving needs.

Generally speaking, in today’s society auditors have a role to play in increasing transparency and in helping combat corruption. Radical changes are taking place in society concerning the quantity, availability, and accessibility of data. More open communication will also enable the profession to inform public opinion on the usefulness and relevance of audit and assurance services. Audit should not be regarded simply as a compliance burden for companies.

When reflecting on what auditors can bring to large undertakings, FEE believes that changes in technology have led to increased access to, and interest in, corporate affairs. In another recent paper entitled The Future of Corporate Reporting, FEE puts forward the idea that the audience for corporate reporting is growing. As such, the needs of this growing audience, both from a corporate reporting as well as an assurance perspective, must be properly addressed. Financial information is still at the heart of the profession, but narrative and non-financial reporting is gaining momentum.

Given the increasing importance that businesses give to non-financial drivers and key performance indicators (KPIs), the profession should strive to address these market needs. Market demand for assurance is also expected to rise as a result of mandatory disclosures of non-financial information for large undertakings. Users of corporate reports might also expect increased transparency on the future viability of the entity.

Therefore, the current 12-month horizon of the ‘going concern’ basis of accounting may not be fit for purpose in the future. Management and/or those charged with governance might be expected to be more vocal about their underlying assumptions on the ‘going concern’ of the entity, along with their forward-looking business expectations. The auditor could be asked to provide assurance over these assumptions.

Small and medium-sized entities have different stakeholders and needs. For FEE, audit should still be seen as a value-added service for this part of the market. Shareholders, banks and lenders, tax authorities, customers, suppliers, and employees value insights into the financial health of businesses. The profession has a lot of alternatives in its service offerings to provide comfort at the right level, although there is a need to remain agile and adaptable when performing audits for, and delivering other services to, small and medium-sized entities. To do so, applying professional judgement and using standards in a way that facilitates proportionate application of the procedures to audit the smallest entities is important. It will ensure that the audit work remains fit for prurpose and adaptable to business and technological developments.

FEE also envisages an enhanced role for the profession in supporting public-sector entities. Management of public finances should be a key priority for governements, especially in Europe. The profession can offer various forms of assistance in this regard: analysis of deficiencies in accounting systems and internal control over financial data and reporting; supporting evolution in reporting standards; and staff training among others. This is an area where the profession can greatly contribute to the public interest.

IT innovation is profoundly affecting all industries and sectors and the audit sector needs to prepare for fast-paced change. For FEE, the core concept of an audit of financial statements will remain but technology is increasingly automating the audit procedures. Computers will therefore take over in full the identification of exceptions or anomalies, the review of trends, and the testing of controls sooner than we might expect.

How evidence is obtained will undoubtedly change, but the judgement of the professional will remain central. Just imagine a fully-automated audit with a certification system. For FEE, the one thing technology will not replace is judgement.

Professional bodies, firms, and other bodies must ensure that the way future auditors are educated and trained remains fit for purpose. Doing so will help smaller firms keep up with the pace of change discussed above.

IT skills shouldn’t be the sole focus when considering changes to the industry’s education and training strategy. Ethics (integrity, objectivity, and professional behaviour) and the ability to exercise professional scepticism in making sound professional judgements will remain key elements of the auditor’s skillset into the future. Understanding the client’s business environment will also remain paramount.

All in all, in the current dynamic business environment, the profession must adapt its training curriculum and recruitment model to include more individuals from non-accounting backgrounds in an effort to develop multi-disciplinary teams and future-proof the profession.

In our most recently-published paper, FEE identified three areas where further work is needed at European level:

 

FEE has a key role to play in raising awareness on what is happening throughout Europe and in developing thought leadership to help its members think about the difficult questions. FEE strongly believes that the future will not only bring challenges, but also a great amount of opportunities for the accountancy profession. But to seize them, we need to get prepared now.