Following the latest audit quality review carried out by the Financial Reporting Council, the principal weakness highlighted by the report was audit firm’s shortcomings in challenging management effectively. Failures were identified in a number of areas including long term contracts, goodwill impairment and accounting for provisions.
There have been a number of high profile corporate collapses following the issue by auditors of unqualified (‘clean’) reports. This leads to a loss of trust in the audit process by users of the accounts and does nothing to close the current expectation gap in what an audit report is supposed to represent.
Of course directors cause companies to fail, not the auditors, but what can be done after so many years of recurring failures? Maybe to carry out an exercise of what has become known as ‘failure study’ should be undertaken, whereupon a detailed examination of past company failures occur, self-criticism is then carried out and finally lessons learned with appropriate recommendations implemented.
Other measures to improve the audit process include increasing private auditors’ competition with more firms able to audit larger corporates, transfer the audit process to a public auditor, carrying out joint audits with two private practices involved and finally further separation of audit/non-audit services to enhance independence.
Whatever happens, it is going to be a difficult challenge to resolve, but I believe the non-auditing world expect some radical changes to occur before they regain their trust in the audit process.
Posted by Nigel Whittle
The views expressed in this article are the personal views of the Author and other professionals may express different views. They may not be the views of Lambert Chapman LLP. The material in the article cannot and should not be considered as exhaustive. Professional advice should be sought in connection with any of the issues contained in the article and the implementation of any actions.