The Auditor: Quo vadis?

South African CA Linda de Beer, writing in the IAFEI Quarterly, asks where the audit profession is headed.

It’s a timely question, given the number of scandals swirling around the heads of auditors. In 2018 a US Federal judge awarded a mammoth $625 million judgement against PwC for negligence in its audit of Colonial Bank. In the wake of UK construction group Carillion’s failure, UK the regulator is considering the breakup of the Big Four audit firms by splitting their audit from their advisory arms. In South Africa, there was an almost overnight demise of KPMG over its involvement in the Gupta companies, and other suspect dealings.

All this raises the question, where will the audit profession fit in the commercial firmament 50 or 100 years from now?

Audit firms are already off-shoring more routine audit work to Asia, where labour is less expensive and productivity higher.

Then there is expectation gap – that gap between the users of financial statements and what the auditor is willing or able to provide. Perhaps the biggest gap is the expectations on auditors to detect fraud and blow the whistle on corrupt dealings. Companies are demanding more than assurance on their financial statements. They want auditors to add value in respect of big data and benchmarking. Audit standards are not yet aligned to these standards.

Enhanced regulation is raising the bar in terms of ethical expectations on auditors. This came about following the International Federation of Independent Audit Regulators (IFIAR) stepped into the breach in the wake of massive business failures at Enron and Worldcom. Audit quality and auditor independence have become the key areas of focus for regulators.

Given the high strakes of a botched audit, the litigation risks are rising. Some have suggested that audit firms should have their own financial statements independently audited and made available to the public.

The audit firm is at a tipping point, says de Beer, and will have to address the credibility gap developed between it and the public.

A study in the UK found that a claim of between Sterling 600-1,200 million can potentially cause a Big Four firm to fail, considering that damages claims are usually settled at about 25% of the original claim. It will have to innovate and address the credibility gap, or it may not remain relevant for much longer.

 

 

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Ciaran Ryan

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