All publicity is good publicity. Not, it would seem, in the case of auditors who only seem to hit the headlines for only the wrong reasons.
Audit firms have limited opportunity to highlight the positive impact of their work. Adjustments are made to the financial statements of clients on the vast majority of audits. But the public is never aware that the final audited accounts differ to those originally prepared by management. A story of an audit failure grabs headlines, a story of difficult conversations between management and auditor resulting in an adjusting entry does not.
Despite calls for greater levels of professional scepticism it is a myth to think that auditors simply rubber stamp whatever is put in front of them.
Long-form audit reports
The introduction of long-form audit reports for main-market listed entities has helped to a degree. Auditors now explain in some detail the areas of focus for the audit and more detail on the work they have performed. The revised ISA 700 standard now extends this requirement to all public interest entities (PIEs), meaning a further 950 or so companies on AIM and countless others with listed debt will start to include this level of information.
An FRC study into the impact of long-form reports for FTSE companies noted “very few examples where auditors reported whether errors were found during testing, the quantum of any errors identified and what was done as a result.”. Could this be an area where auditors can improve both transparency and take credit for their work? Understandably the owner of the accounts, the client, is likely to resist such disclosure.
Focus on fraud
It is reasonable that high-profile investigations into the audits of household names attract significant media attention, but some balance is required. Take for example the Tesco accounting scandal from 2014. The announcement of the initial investigation by the FRC into PwC’s audit was front page news. When the FRC dropped the probe in June 2017, concluding that there was “not a realistic prospect” of an adverse finding, the reaction of the press was limited. Rather than being critical of the reporting, this simply highlights that scandal sells and auditors are easy targets when anything goes wrong.
Finding fraud is not the primary purpose of an audit, as any audit opinion clearly states. However, the work of the largest audit firms is rightly scrutinised where their conduct falls short of the requirements in relation to fraud. Audit firms should re-evaluate whether their own work in this area genuinely addresses the risk for the client, and for their own reputation.