The problem with trust is that it’s often assumed and not necessarily earned, writes BDO Johannesburg Managing Partner Bert Lopes.
In an environment where slow economic growth is negatively impacting corporate performance, it’s creating domino effect in the trust relationship between auditors and their corporate peers. Not to say there is a lack of trust, rather it highlights the clearly necessary changes in how auditors and the users of financial statement information interact with each other into the future.
Traditionally this relationship has been driven by the defined scope of an audit. The question we should be asking ourselves is whether a defined scope of audit is still an acceptable (and appropriate) foundation for trust, or whether “open brief” audits should not instead become standard?
Indeed, changing times trigger an evolution in the roles and responsibilities of auditors, boards and board audit committees. This raises the need for tough questions about how an audit is scoped, how it is billed and how its final outcomes are presented.
So, if we are to apply traditional logic that trust is earned by being trustworthy, then we need to reframe the structural make-up of our work in a way that addresses much needed confidence in verified, trusted and indeed comprehensive information about the health of a business or organisation.
But this is not – and cannot – be the responsibility of the audit profession alone. While the implications on auditors are significant, the mandate of boards and board audit committees are equally (if not more) urgent in ensuring greater audit independence and accountability.
It is a little bit of chicken and egg. What we do know is that recent years of corporate performance are negatively impacting the market, and consequently are raising the expectations on the auditor and the auditing profession. What we don’t yet know is how the audit sector will respond.
This is an international concern across most capital markets especially the UK, US and the EU. There are various commissions considering how the auditing profession should be structured to ensure greater auditor independence and accountability, and some of the areas being considered include
- INCREASED REGULATORY SCRUTINY OF AUDIT COMMITTEES (both for listed clients or Public Interest Entities’ ): This includes a requirement for audit committees to report directly to the regulator before, during and after a tender selection process; as well as throughout the audit engagement so as to demonstrate how they are monitoring quality.
- MANDATED JOINT AUDITS (for listed organisations): This includes a requirement for separate tenders and appointments at different times, joint audit plans, and an ‘efficient’ division of work and ‘cross review’ where relevant leading to a joint audit opinion. In addition, each auditor is still required to ‘form its own understanding of the company and assessment of audit risk’ in finalising its audit opinion.
- A FULL STRUCTURAL OR OPERATIONAL SPLIT BETWEEN AUDIT AND NON-AUDIT SERVICES
But it is not just a global focus. In South Africa we have had a further negative event impacting on trust, with auditors implicated in both “state capture” as well as high-profile corporate failures. The reasons are well known, but what is more important is that the audit profession will continue to attract both media and public attention.
What is more important, is that this is good and should be wholeheartedly welcomed.
Mandatory audit rotation will bring with it an aspect of renewed trust, in itself preventing embedded relationships from creating unintended consequences for company and organisational information.
But it needs go a lot further in how we embed this new era of governance in the realities of our every-day work.
It goes without saying that stronger governance will drive improved trust and confidence in business and government. In fact, it is the key to accomplishing the building of resilience, improving sustainability, and assuming responsibility is essential for regaining the public’s trust and inspiring confidence.
To do this we need to focus on the following: How we collaborate to tackle corruption and advance responsible conduct, how we create a secure and digital-ready investment environment, how we embrace integrated reporting, how we strengthen governance in the public and private sectors and finally, how we enhance public financial management.
These points help us to earn the trust needed to build a bond and strong rapport with the auditing profession. Again, this cannot be done by auditors alone and requires a similar commitment from government, regulators, audit committees, boards and various other stakeholders in a way that supports the independence of auditors and their ability to review facts well beyond a defined audit scope.
We see auditor independence as a property of auditors' interests, both at a personal level and at the level of the accounting firm. A proper assessment of auditors' interests requires a holistic approach. That is, in assessing auditor independence, we must examine the totality of auditors' interests as there remains the concern of how auditors build value building on working relationships and remaining independent. It is entirely incumbent on boards and board audit committees to enable this as holistically as possible, without fear or favor.
So where do we need to focus?
Ultimately the audit profession needs to gear itself to answer to the following three questions:
- How has the audit profession satisfied itself that the scope of an audit is appropriate?
- How has the audit profession challenged boards and board audit committee in terms of independence of the audit as well as accountability for its outcome?
- How has the audit profession addressed its own risk management controls and processes to ensure an audit has considered all aspects of an organisation, not just satisfaction with the defined area of an audit?
Indeed, if we are to win back trust things must change.
We are prepared to make the changes from the sector’s point of view – what we need now is for this to be met with the same vigour by boards and their audit committees that includes a renewed appreciation for independence of auditors.
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