Audit controls in for a ‘complete rewrite’
The head of the international audit standard setter has flagged an overhaul of quality controls for financial audits to be more proactive and aligned with modern risk-management frameworks.
It is likely to trigger upgrades to the multimillion-dollar audit systems of big firms such as PricewaterhouseCooopers, Ernst & Young, KPMG, Deloitte, Grant Thornton and BDO.
International Auditing and Assurance Standards Board chair Arnold Schilder is in the country this week, warming stakeholders to the board’s new work program – a formidable list with the potential to be as disruptive as controversial long-form audits adopted by Downer EDI, Cochlear and ASX Limited this year ahead of a 2017 mandatory start date.
The IAASB’s new agenda includes a body of work on professional scepticism, group audits, and fair value estimates used by financial institutions.
The board aims to release a consultation paper by the end of this year and an exposure draft in the first half of 2017.
Auditors more visible
Professor Schilder said despite the grilling over long-form audits he copped from directors and others when he visited Australia two years ago, feedback from the United Kingdom, which is in its third year of the regime, has been positive.
The obscure change requires auditors to identify key areas of risk and outline in detail the stress testing undertaken to satisfy themselves about the financial performance and position of the company.
In the past, this information was for audit committee’s and senior management’s eyes only.
Professor Schilder said the changes are enticing investors and analysts to actually read audit reports. And auditors generally like the increased interaction with audit committees and management.
As the visibility of auditors increases, a number of senior audit figures are worried about a recent surge in litigation against audit firms and partners.
Professor Schilder shares this concern. “A litigious society is not open to innovation,” he said. “Its attitude to enhancing existing practices becomes defensive and reactive.”
Calls for consistency
It comes as Portugal on Tuesday became the 111th country to sign up to use IAASB standards as its default framework.
Professor Schilder said this is not an issue of countries carving out exceptions to the IAASB standards. The problem lies in how domestic regulators run their inspection programs.
Big audit firms are trying to roll out consistent audit methodologies across global networks to manage risk and cut costs.
Multinational clients also want consistency in group audits.
But inspectors have wildly varying expectations. Firms are racking up an embarrassing tally of infractions with the International Forum of Independent Audit Regulators.
The IAASB will also scrutinise the impact of technology and “big data” on audit quality in its new work program. It comes as the world’s biggest audit firms invest hundreds of millions of dollars in new digital systems to improve audit insights.
IAASB deputy chair Chuck Landes said while technology is being used more extensively in audits, it has not yet changed the fundamental requirement for an individual to exercise professional judgement over the data.
“I don’t see the use of data and artificial intelligence reducing the human component,” he said.