Roundtable: How the audit sector is facing sweeping change
Audit firms, investors, boards and regulators discussed the impact of changes in the auditing sector at a recent roundtable with The CA magazine. Robert Outram reports.
Audit in the UK has seen major changes in recent years.
Reporting requirements have been stepped up for both auditors and audit committees; reforms in the audit market at UK and EU level are tightening the rules on auditor rotation and the provision of non-audit services; and, over the past decade, auditors of listed companies have been subject to inspection by the Audit Quality Review Team of the Financial Reporting Council (FRC).
Chairing the roundtable discussion was Andrew Dougal CA (pictured below, centre), chair of the ICAS Technical Policy and Services Board. A former chief executive at FTSE 100 business Hanson, he is now a member of the audit committees of three FTSE 350 plcs, in two of which he is audit chair.
He began with the enhanced reporting requirements for auditors and audit committees. Have they increased transparency?
'More clarity to the process'
Andy Kemp (pictured below, left), an audit partner with PwC and chair of the firm's non-executive director programme, commented: "The level of debate is significantly enhanced, compared to even three years ago, and that's to be applauded."
Mike McKeon CA, former chief financial officer with Severn Trent Water, agreed. He said: "The fact that the audit report is much more extensive now, and is published, focuses the mind, not so much for the CFO but, in particular, for the other directors."
Robert Overend, a partner with EY responsible for audit methodology, said: "It has brought more clarity to the process… forcing everyone to think more clearly about what the auditors, and the audit committee, are saying."
Marian Williams, a director of codes and standards with the FRC, noted that audit firms had taken different approaches in completing their "extended" auditor's reports. She added: "We purposely didn't set out a template for how this should be done, and we are encouraged by the response of the firms to these changes. We are on the start of a journey; we are not there yet."
Head of governance and stewardship with Standard Life Investments Guy Jubb CA said that in some cases, greater detail from the auditors on how they had addressed key audit issues had been very useful, although he added: "On the clarity of materiality, there is further to go."
Andrew Dougal noted that, based on his own experience: "In most large companies the quality of the work of the audit committee has already been improving… with these additional reporting requirements, we're getting transparency now regarding good work that was ongoing."
In the spotlight
But how much attention are institutional shareholders paying to the dialogue? Paul Marsland is corporate governance manager with Manifest, the independent stewardship support business.
He noted: "It's fair to say there are more conversations [on audit matters] than there is voting [on audit issues], but even in conversations about stewardship, audit is still very much a poor relation to remuneration."
David Wood, executive director, technical policy and practice support with ICAS, said that he welcomed the FRC's audit reporting model but regretted that it had taken some time to get to the point where the audit report could highlight key audit issues without providing wholly new information about the company that was not disclosed elsewhere. He said: "It is a shame all this did not happen sooner."
There is some value to a fresh pair of eyes coming in, but it will have an effect on the cost base if you have four or five firms tendering every five to 10 years
Another key issue is the impact of the EU's audit market reforms, which are to be implemented in detail by the UK government. The regulations call for, among other things, mandatory audit rotation and tendering, for "public interest entities" (PIEs) and tighter limitations on the non-audit services that firms can provide for their PIE audit clients.
Steve Maslin, head of external professional affairs with Grant Thornton and chair of the firm's partnership oversight board in the UK, said that the most important thing was what the reforms might mean for audit quality. He added: "Changing the complacency around auditor appointment decisions, and tendering, and getting people to think about audit quality, has to be a good thing."
Mike McKeon said: "From a CFO's perspective, I think it's good that companies put their audits out to tender at reasonable intervals, although it's a pain to do."
He added, however, that an issue for executive directors was the fact that whichever firm is appointed as auditor will likely be barred from providing most non-audit services: "So it's as much about what you are going to lose elsewhere in terms of services, as it is about what you're going to gain from changing the auditor."
A concern for some panel members was that the new rules could lead to audit-only firms. Andy Kemp said that if this happened, he feared that specialist audit firms would not have access to the range of skills required for the audit of a large, complex business.
He commented: "If we said the only people who can work on an audit are those in a specialist audit firm, we would reduce the quality and increase risk."
Doug King, an audit partner with Deloitte, also argued that audit-only firms would face recruitment problems: "There is a danger that, if we drive audit into a box, we will not be able to recruit, train and retain top talent."
Mike McKeon pointed out, however, that the model of separate, ring-fenced audit entities has worked in France in the past and said that, in his view, this is where the EU regulations might lead.
David Wood commented: "There is some value to a fresh pair of eyes coming in, but it will have an effect on the cost base if you have four or five firms tendering every five to 10 years. Will that be absorbed by the firm or the client? What is it going to do to budgetary pressures within the firm? And will that affect audit quality?"
The view of the audit firms was that audit quality remained paramount, despite cost pressures.
The panel also discussed the Audit Quality Review Team (AQRT) process. Marian Williams (pictured above, right) commented: "The figures show that audit quality is improving, year on year, but there remains more to do in this area. We have commissioned an external review of the process, which we'll be incorporating in the 2016/19 strategy."
Steve Maslin (pictured above, left) said: "There is no question that the introduction of independent inspections has increased audit quality over time. If there's a criticism of the AQRT, it's that it's about the quality of the file, sometimes at the expense of the quality of the challenge."
'No common language'
One of the concerns expressed in the discussion was that focusing on the AQRT scores might detract from an auditor's professional judgement. Another was that, for investors, if a firm's report identified areas where "significant improvement" was required, there was nothing to indicate which particular audits had been found wanting.
Some panel members felt that AQRT reports focus on areas of weakness but do not represent firms' strengths, or issues on which the auditor has taken a robust line. They create headlines focusing on audit deficiencies, while the consensus is that audit quality has improved and continues to do so.
Andy Kemp also noted: "There doesn't seem to be a common language to describe the other things that are going on: the training, the 'tone from the top' and the international network… the next stage needs to be about looking at how we combine all of that to give comfort around audit quality."
Marian Williams said "There is a lot going on in audit... but we recognise that there is a demand for other types of assurance. The demand needs to be market-led and we need to ask investors and other stakeholders what they need from it."