Part of the solution

Recent high-profile company failings around the world have led to recommendations for changes to improve audit quality.

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In the UK, high-profile corporate collapses such as that of retailer BHS and construction group Carillion have led to investigations into various aspects of the audit market.

Late last year John Kingman’s independent review of the Financial Reporting Council (FRC) – the UK regulator for the accounting and audit professions and corporate governance – recommended that the organisation be replaced by a new independ­ent statutory regulator with enhanced powers. The Competition and Markets Authority (CMA) has also raised serious concerns about the level of competition in the audit market and the quality of audits. The CMA has proposed a series of reforms such as splitting the audit and advisory businesses of practices, and requiring joint audits for large companies to encourage more choice in the audit market.

The House of Commons’ committee on business, energy and industrial strategy is also conducting an inquiry into the future of audit, while the Department for Business, Energy and Industrial Strategy itself has appointed Donald Brydon, former chair of the London Stock Exchange Group, to conduct his own independent review of the quality and effectiveness of the UK audit market. This will build on the work of Kingman and the CMA by testing the current audit model and considering issues such as how far audit can and should evolve to meet the needs of investors and other stakeholders.

Expectation gap

‘Audit is not an industry that people think is redundant,’ says Andrew Gambier, ACCA’s head of audit and assurance. He sees the audit as remaining an important element in corporate governance frame­works. A 2018 ACCA survey of 1,000 members of the public found that 65% believe audit should evolve to prevent company failures, and 41% expect aud­itors to always detect and report any fraud. (The full survey results were published in a recent report, part of a global research initiative with CA ANZ, titled Closing the expectation gap in audit – link at the end of the article). ‘I see this expectation gap as quite positive,’ Gambier says. ‘It would have been easy for the public to say audits are a waste of time, but we didn’t hear that. People see audit as part of the solution to preventing company failure.’

Outside the UK, corporate collapses and scandals have also raised concerns about audit quality and auditor independence. Deloitte and KPMG, for example, are under investigation by the Securities Commission Malaysia in relation to their audits of 1MDB, the state-owned investment company mired in scandal. KPMG in the US has also attracted negative headlines after the US Public Company Accounting Oversight Board (PCAOB) revealed it had found problems in half the KPMG audits it inspected in 2017 and almost half those it inspected in 2016.

In South Africa, scandals include the collapse of VBS Mutual Bank after a clean audit report from KPMG, and an ex-employee has been referred to disciplinary proceedings after alleged moneylaundering activities by Linkway Trading, owned by the Gupta family. In a statement on VBS, KPMG said it had ‘taken many steps’ to deal with the issue and welcomed the ‘independent scrutiny’ of the regulatory board for auditors.

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