Audit at the crossroads

Change has been a constant friend throughout my professional life.  We have not always got along; however, as I now look back over my 52 years in the profession, I feel able to say I have enjoyed the challenge brought by change.

I have been an auditor for 46 of these years and witnessed very little change which brought great benefit to society.  There has been no shortage of opportunity to change, but those moments of significant pressure came because of business failures, and the audit profession successfully defended the status quo. 

Today we have a perfect storm.  We have another business failure in the UK, putting the audit profession there under the microscope, with changes promised; technological developments by the large audit firms are expected to fundamentally challenge the way audits are performed; societal development is bringing information, both true and false, to many more people and we increasingly  expect more from politicians and business leaders to act to address crises, notably climate change and financial sustainability. 

As we face up to these challenges, we should see them as opportunities to lead change for the better: better for the audit profession and better for those we serve – the wider public interest, rather than the traditional, very narrow creditor and investor communities. 

Increasingly, we no longer accept the elitism of politicians and business leaders determining what is good and right for us and them. Society wants its stake in solving specific problems. Leaders from civil society, labour, academia, faith groups, women and marginalised communities will sit alongside politicians and business leaders. I write this on the day of the global climate strike.
 
This multi-stakeholder approach will be essential. The digital future does not recognise the elaborate distinctions of power and protocol that government, business and regulators have spent decades building and safeguarding.
 
The current audit and accounting frameworks were designed in a different era when rules and regulation were rooted in ‘physical’, tangible assets. Today we are seeing a whole new ‘digital’, intangible world which is disrupting old thinking.
 
Change through disruption, by its nature, happens quickly and unpredictably, yet in regulation, change happens only as quickly as standard setters and regulators allow it. Outdated regulation holds back the benefits of innovation.
 
To add to the challenge, any significant change could lead to unleashing competition in a new architecture for the provision of audit, which could leave the existing audit profession behind and would be truly disruptive.
 
Such competition could create a race to the top or a race to the bottom. Regulators and the audit profession must work together now to point the audit framework in the right direction, before we lose altogether the audit profession and with it, the hard-earned trust of society.

We should strengthen the multi-disciplinary practice models which audit firms use to audit complex global business combinations.  Complex audits require a rich mix of expertise working in close, integrated teams to be efficient and effective.  All these experts, from their different backgrounds, must work to the same ethical code of behaviour, imposed by the multi-disciplinary firm.   These same firms must be independent of their audit clients and therefore relinquish the right to provide any other services to that client during their audit appointment.  The wider global audit profession and regulators must build and retain the trust of the societies we work in and for, and to do this we must be, and be seen to be, independent.

To be truly independent, the auditor must also be given freedom from the intense pressures which exist when businesses are in distress, to make difficult decisions when applying professional judgement and reporting in the public interest.  The audit profession should be leading discussions with regulators to change the reporting environment, to help reduce the internal and external pressures on auditors in their exercise of professional judgement.

There can be many reasons for businesses being on the brink of distress or insolvency. The application of accounting standards by a business can play a significant part in hindering the reality of financial sustainability at a date in time.  Financial sustainability is a much more relevant concept than the much narrower ‘going concern’ concept.  Obviously, there are well known reasons why there has been no change from our present position, but the audit profession, regulators and accounting standard boards should acknowledge that there is a problem and grasp the opportunity to address these difficulties with urgency. 

Distress can, of course, be as a result of fraud, corruption and mismanagement.  For decades, the audit profession has, for good reason, defended the current position.  Given the advances in technology and more sophisticated tools which are increasingly available to auditors, the audit profession should think afresh and with an open mind as to how their role might change as a consequence.

The adoption of these technological changes within audit firms is to be welcomed by all.  Unless managed in the public interest, the possible unintended consequence of a ‘have’ and ‘have not’ audit profession could, however, deliver a catastrophic reduction in the number of suitably qualified audit firms.    

I am hoping, but not hopeful, that my beloved audit profession might just wake up to the thought that courage is the power to let go of the familiar and change is the law of life.  Those who look only to the past or present are certain to miss the future.