Auditor Purpose has been saved
Sinead Moore and Paul McGarry share insights from a recent study by Deloitte’s Young Audit Professionals Group on how the next generation of audit leaders perceive their role and purpose.
The role of auditors will rightly be in the spotlight during this challenging time for our economy. Auditors are expected to challenge directors and management as they assess the impact of COVID-19 on their business and make key judgements on critical areas, such as going concern and viability, to support shareholders and the capital markets.
This vital role will be performed against a backdrop of intense focus on the audit profession in several countries, notably the UK, following highprofile corporate failures. While the debate covers lots of ground including competition, conflicts of interest and the growth of non-audit services by audit firms, a critical element of the debate centres on the fundamental question: what is the purpose of an audit?
Consistently defining the purpose of the audit has always been difficult. The profession has often been accused of hiding behind the expectation gap (i.e. while legislation and regulation have a narrow definition of what an audit is, the public has a broader expectation). If you ask a practitioner to define an audit, you will typically get the standard definition: ‘to provide an opinion on whether a set of financial statements present a true and fair view’. In embarking on this study, we therefore approached the question from a different perspective – what do young professionals perceive their role to be? What is their purpose, and how do they see themselves?
The responses tell us that practitioners have a more nuanced and more in-depth view of their role as an auditor, in contrast to the narrower definition of an audit. The findings indicate that practitioners have a common view that, in addition to providing assurance over the financial statements, it is their role to:
- understand the business models of the entities they audit;
- understand the organisation’s internal controls and provide challenge and insight to improve those controls;
- provide expertise on financial reporting matters;
- use technology to increase the assurance the auditor is providing; and
- look to the future, understand the risks facing the business, and provide relevant insights.
Practitioners believe that they are completing the tasks above in their day-to-day activities, though not necessarily in a consistent fashion. There is a clear appetite to fulfil these roles more comprehensively going forward and in doing so, bridge the expectation gap. But much more importantly in the eyes of the young professionals is ensuring that the role of the auditor is meaningful, valued by stakeholders, and attractive as a career
In their day-to-day work,the young professionals felt that, while the audit process frequently resulted in entities making changes to their reported numbers and improving disclosures in the financial statements, this was mostly unseen by the broader users of financial statements
Let’s explore some of the themes that emerged in more detail – first, internal controls. Young auditors firmly believe that understanding the control environment is a key part of their purpose. Furthermore, they view the provision of insight and opinion on those controls as an essential part of their job and believe that they provide this insight to the management of their audited entities in their current role. However, they perceive an inconsistency in how this role is fulfilled across different types of entities given their size, their industry or their ownership structure.
The study also pointed to a perception that the more structured framework for internal control reporting for entities subject to the requirements of the US Sarbanes-Oxley Act is effective. This contrasts with the legislative framework in Ireland, where there is no formal reporting on internal controls. Indeed, participants in the study highlighted the following shortcomings:
- a lack of detail in audit reports on which procedures were performed to obtain an understanding of the control environment; and
- the areas where the auditor was unable to obtain assurance over the internal control environment and therefore conducted substantive, detailed testing.
A key conclusion, therefore, is that a formal testing and reporting framework, including the specifics of the procedures performed and results obtained, should be reported not just to management and those charged with governance, but also publicly to the users of the financial statements
Even before COVID-19, the use of technology in the audit was increasing. Respondents were unanimous in their view that increased use of technology can improve audit quality, improve the efficiency of the audit process, and enhance the insight auditors offer to management and those charged with governance.
However, the study highlighted several challenges. First, obtaining data in a usable format to enable technologies is a fundamental issue in facilitating the more widespread use of tools and technology. Privacy and security concerns have made it difficult to get large datasets or continuous access to entities’ systems and have slowed the adoption of many audit tools.
Second, the competencies required to use innovative technologies, including enhanced analytics, are different from the current core skills of many practitioners. To reap the full benefit, auditors therefore need to develop new skills and firms must continue to invest in embedding technology into internal training and methodology. Also, third-level institutions and professional bodies have a responsibility to integrate technology and analytics into course curricula, as Chartered Accountants Ireland has done with the introduction of data analytics, artificial intelligence and emerging technologies as part of the FAE Core syllabus.
Business Model and Future Risks
Arguably the most interesting findings of the study were related to understanding the business model and the future risks faced by the audited entities. At its most basic, this was what defined auditor purpose in the eyes of the young audit professionals – the job of the auditor is to understand the business, the risks it faces, and ensure that the financial statements present that reality. This aspect of the role gave them the most satisfaction: understanding the business, challenging management on their judgements, assumptions and outlook; and ensuring that the disclosure in the annual report reflected this in a fair and balanced way.
In their day-to-day work, the young professionals felt that, while the audit process frequently resulted in entities making changes to their reported numbers and improving disclosures in the financial statements, this was mostly unseen by the broader users of financial statements. The participants highlighted that the pass/fail nature of the audit report did not adequately reflect the challenge and output of the audit and that, to date, the expanded audit reports had not improved this significantly.
According to the study, the critical barrier to disclosing more tailored information in audit reports was the ingrained concept of a ‘clean’ audit opinion – auditors and preparers alike found it difficult to move to a less binary conclusion. A variety of themes emerged around this, including developing different forms of assurance over elements of the annual report and in particular, how audit reports may evolve to include more detail on audit judgements without creating the risk of a perception of a qualified audit. The young professionals concluded that audit reporting must evolve to accommodate more information for users on judgements.
Overall, the study provided some powerful perspectives on how our young auditors see themselves. It demonstrated that the next generation of audit leaders are passionate about their profession and are not satisfied to hide behind the expectation gap to defend the role of the auditor. Indeed, they have a strong desire to develop the role of the auditor to meet the expectations of the public and believe that this is achievable.
We also concluded that as a profession, we must focus on further developing
the theme of ‘auditor purpose’ to curate some simple messages and language
that aligns with this deeper purpose and value of audit. In particular, we should
encourage a proactive discussion and debate on auditor purpose to ensure the
role of audit is understood, continues to have public interest value, and is an
Young Audit Professionals Group
The young audit professionals group is an initiative across the Deloitte network that brings together the next generation of audit leaders to advise current leadership on critical strategic issues facing the audit profession. The ‘auditor purpose’ study was conducted during the second half of 2019. The study consisted of a survey of all Deloitte audit professionals in Ireland, supplemented by focused workshops with groups of young audit professionals. The study was conducted before the recommendations arising in the report of the Independent Review into the Quality and Effectiveness of Audit, compiled by Sir Donald Brydon, were published. Although the scope of the study differed, the findings and themes are mostly consistent with the core recommendations in the report.
This article first featured in Accountancy Ireland Magazine August 2020