Substantial improvements in audit quality are possible as a result of in-depth analyses that firms are undertaking to identify the root causes of quality issues, audit regulators said Tuesday.
“There are some very interesting things going on in this profession right now,” Lewis Ferguson, chair of the International Forum of Independent Audit Regulators (IFIAR), said during a news conference. “It’s quite exciting to watch what’s happening. I’m actually reasonably optimistic that we will see some significant improvements.”
Internal control testing, fair value measurement, and revenue recognition were the areas that showed the highest number of audit inspection deficiencies in an IFIAR survey of inspection findings performed in 2014, according to results released Tuesday.
Ferguson, a member of the US Public Company Accounting Oversight Board, said high levels of deficiencies continue to be found in vital areas of public company audits around the world. The survey report summarised key inspection results from audits of public companies submitted by 29 IFIAR member regulators from around the world.
Ferguson said root cause analysis can identify factors leading to audit issues, helping firms to correct them.
“What the firms need to do is really try to understand at a very fundamental level what is preventing consistently high-quality reports,” he said. “This is really a question of consistency of execution. It’s not a question of the fact that the firms don’t know how to perform high-quality audits. They do. We see that.”
Areas that may be identified in a root cause analysis, according to IFIAR Vice Chair Janine van Diggelen, include insufficient supervision and review, time and resource constraints, lack of professional scepticism, and lack of knowledge of accounting and auditing.
Van Diggelen is head of the Audit & Reporting Quality Division at the Netherlands Authority for Financial Markets. She said audit firms may attempt to address audit issues through more training or internal guidance that can be helpful, but may not be focused on the root cause of the issues. Van Diggelen said issues firms are examining related to audit quality include:
- Tone at the top.
- Messaging and internal communications.
- Access to experts.
- Supervision and review.
Enabling internal quality control to do more real-time reviews can improve audit quality, and so can linking audit quality to performance reviews and remuneration, van Diggelen said. She said it’s also important not to just focus on the audits with quality issues as firms build their action plans.
“It’s also important that the firms also look at those audits that are very high-quality, to learn from what made the audit high-quality, and also to use those insights,” she said.
Ferguson said large audit firms in particular are taking leadership in finding strategies for improvement in root cause analysis, which he said are in their early stages of development. Center for Audit Quality Executive Director Cindy Fornelli said in a statement that public company auditing is a dynamic field that responds to the evolving demands of a global economy.
“The profession is strongly committed to an ongoing cycle of improvement, which means continuously evaluating approaches and methodologies, responding to issues that stem from the inspection process, and remaining focused on the core tenets of independence, objectivity, and scepticism,” she said. The CAQ is affiliated with the American Institute of CPAs.
Analyses by firms have shown that audit quality issues often occur as a result of multiple causes, Ferguson said. He said one strategy that seems to be effective in addressing some of these causes is making sure the audit planning is done very thoroughly.
It’s important, Ferguson said, to make sure the most difficult issues are identified early in the process so the appropriate people can be assigned to them. He said it’s better for these issues to be dealt with early rather than at the end of the audit cycle, when deadline pressure can be significant.
Ferguson said the use of data analytics also shows promise for auditors, giving them the opportunity to look at larger samples of data and find anomalies to investigate further.
“There is some very interesting thinking going on,” he said. “I think some of the kinds of things that are happening, particularly at larger firms, are very interesting indeed, and I hope over time they will pay off.”
—Ken Tysiac (email@example.com) is a CGMA Magazine editorial director.