Audit only firms – what will this mean in practice? has been saved
Audit only firms – what will this mean in practice?
William Touche, Vice Chairman, head of Corporate Governance, and FTSE audit partner provides a view on the current audit debate, and suggestions that audit only firms could be the answer to current challenges to the profession.
In the current environment I am often asked for my views on whether ‘audit-only firms’ are the solution to the ongoing concerns about quality, competition and perceived conflicts of interest in the audit profession.
My perspective on the debate is shaped not just by my role as a FTSE 100 audit partner, but also by my other responsibility as head of Deloitte’s Corporate Governance Centre. This job involves interpreting the latest regulatory developments and helping company boards and auditors understand and prepare for them.
In answering the question about audit only firms, I want to move away from theoretical argument and look at the practicality of audit-only firms: what would it actually mean for me in my role doing large, complex audits of acquisitive companies with businesses in many countries? Here, I rely on a whole range of specialists to ensure a comprehensive high quality audit. It might be a technology expert who understands the intricacies of a company’s ERP systems; a pensions specialist who can advise me on what the actuaries are recommending; or a valuations specialist who can give me a considered independent view on how a company is valuing its assets. If an organisation has complex hedging instruments I’d call on a financial products expert or a process controls specialist to evaluate the company’s design of its global processes. And I can foresee that in the not too distant future I’m going to need specialists in blockchain and artificial intelligence to interpret the decisions and transactions that will be embedded in enterprise software.
Could an audit-only firm really attract people with such specialist knowledge? I am sceptical that this would be possible. And even if it could, would that firm be the right environment to help such people maintain their edge in their chosen field? These deep specialists need to continually enhance their skills and keep up to date with leading technologies and professional development, whether that’s in pensions or blockchain.
But what if? If I picture my job in a world of audit-only firms, I would have to find these specialists from other firms to support me not only deliver an audit but even just to pitch for an audit in a tender. In practice, that would mean additional complexity and costs to the company and its shareholders in contracting a range of reputable specialists to work with. But there is also the additional challenge of finding firms with these specialists willing to accept all the independence requirements in the auditor’s ethical standards and the unlimited liability attaching to an external audit.
Taking this one step further, this range of third parties would by definition be brought in to work on some of the most complex, material areas of an audit, and therefore, their work would for sure require reference in my audit report – and may even require individual reports from these specialists to be included in a company’s annual report. This is all completely at odds with shareholder demands to reduce the length and complexity of annual reporting. Furthermore, I also believe it would lead to a reduction rather than increase in accountability of the auditor, given the reliance on all these third parties in material areas.
Sounds like an unhappy destination? I think so - not only for myself as an auditor, but more importantly the challenge it will bring to delivering the quality of audit required of us by the markets and wider stakeholders. I believe we can address audit quality concerns and perceived conflicts of interest in other ways.
Firms with a multi-disciplinary model — providing wider services beyond audit — have the best mechanisms to challenge large companies, attract specialist talent and develop the skills, expertise and global consistency needed for good quality audits. Such firms are also better positioned to offer a broad and varied range of career paths that ensure they attract and retain the best talent to the profession, and have the financial resilience to invest and brand reputation to stand up to the world’s largest companies.
There is a clear need for change and a need to address the misunderstandings about audit scope and quality, concerns around choice and competition in the market and the changing needs of stakeholders and society. I am really supportive of a fresh look at what the audit of the future needs to look like, especially in the context of the technology enabled company of the future and the evolving social purpose of companies and all the additional reporting that this will entail. The framework for audit must evolve with the times to remain relevant, effective and trusted – however, audit-only firms are not the answer.