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EC AUDIT REFORM: Expectation gap unlikely to close

Improving auditor involvement with the front end of the annual report, providing greater assurance outside the report and boosting communication between auditors, regulators and a company would improve audit quality, according to the European audit profession.

The majority of 700 respondents to the EC's green paper on audit reform believe the expectation gap between what the public expects an auditor to do - report on a company's financial health - and the auditor's actual role is unlikely to be closed.

There is also general agreement that more information could be provided on the audit process.

The Big Four said that although some measures may be helpful in strengthening the role of the audit, an auditor’s mandate is to issue an opinion as to whether the financial statements give a true and fair view in accordance with the relevant reporting framework.

“We support the International Auditing and Assurance Standards Board project that is already under way to consider how the audit report may need to evolve, including the possibility of more information about the audit methodology employed,” Ernst & Young said in its response.

Regular dialogue

Echoing suggestions from the professional bodies, the firm said that enhanced communication can improve overall quality.

“Audit quality requires an effective process of regular dialogue and challenge among the auditor, management and the audit committee. Much of this process remains private and unreported, which causes some stakeholders concern," the statement continued.

In a summary paper, the majority of professional bodies said that reporting on financial health is not the purpose of an audit. Also, the time gap between the year end and the date of the audit can’t be shortened without damaging audit quality.

Investor representatives said they would like to see audit firms ensure a greater and more visible “tone from the top” as well as consistency of key judgements across clients, according to the report. 

Academics suggest expanding the content of the auditor’s report “is critical not only to reduce the expectations gap but to also provide greater incentives for high quality audits”.

This month, the International Accounting Bulletin will publish a round table discussion on the EC Audit Green Paper proposals. This discussion includes the views of public policy leaders from the PwC, E&Y, mid-tier firms, the ACCA and De Montfort University.

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