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The future of audit: adapting to change

Following the publication of a number of reviews into the UK audit industry and global scrutiny of the profession, RSM’s global leader of quality and risk, Marion Hannon, reflects on how firms need to adapt to change to help reform the industry.

With changing audit regulations across the globe and increased focus on audit and what it delivers, the future of the industry poses a number of questions for regulators, professionals and the public.

In the UK, the Competition and Markets Authority recommended an “operational split” between audit and consultancy services to reduce the “distracting interest” of more profitable work being acquired by reduced-cost audits.

There was, as one might expect, opposition from the Big Four, and in May KPMG announced plans to overhaul its UK governance structure. It will be creating a new audit executive committee to oversee performance and management of its audit business. Notably, it will not be separating its audit and consulting operations fully.

Meanwhile, regulators in some Asian countries are adopting tougher standards and increasing independent oversight in a bid to tackle the limitations of financial reporting. For instance, in 2018 Hong Kong introduced new legislation to boost its Financial Reporting Council by giving it the independence to investigate and discipline auditors.

Why? One role of auditors is to provide capital markets with the assurance they need to operate with confidence. In that role, it is perceived in a number of countries around the world that the profession is failing to live up to expectations.

Audits are viewed by the public as a fraud-prevention tool, and that they guarantee the health of a company. The fact that public expectations are not always accurate in terms of what an audit does deliver gets lost in heated debate and outrage. Recent high-profile company collapses have started to erode trust in the industry.

What is being done?

There are no quick or perfect solutions to reforming the audit industry and, given the market’s complexity, it is too easy to criticise the reforms that are being proposed. Moves to encourage operational splits and ring-fence the audit practices of dominant providers could help with external perceptions.

This would be better supported by an element of cultural shift, wherein auditors stop seeing the companies we oversee as clients. This would act as a catalyst, driving real change in the way our industry works.

An alternate solution is joint audits, whereby large providers are partnered with smaller firms, to cross-check workings and diversify experience. While joint audits are one way of this exposing non-Big Four auditors to larger companies, it assumes that all firms want to target their offering to FTSE 350 companies. Joint audits may diversify exposure and offer a good opportunity for people to learn, but they are not a silver bullet and show the complexity of the task that regulators are facing. 

If regulators feel forced to act, then there is a clear need for firms to do the same. The answer is not for us to retreat to our comfort zones – audit needs to adapt and remain relevant if it is to restore the transparency and trust that has been lost. The public debate about what society needs our profession to become is just beginning, but it is one we look forward to having.

To future-proof our own audit capabilities, we are investing heavily through our new audit methodology, RSM Orb, and seeking to further develop this through the use of data analytics tools. Currently, our main focus is on the roll-out of our new audit methodology across our network.

Another challenge is talent. Audit is an increasingly specialised discipline that requires specialised training. Ensuring that we attract a diverse range of smart and engaged people into our profession is absolutely vital. Auditing in today’s world is challenging, and at times auditors face enormous pressure from regulators and their clients, but the opportunity is vast – the industry needs to tell that story better.

We need to be proud of our role as auditors, and that pride needs to come to the fore as we work to embrace change and rebuild trust. It will not happen overnight, but it will be the best way to ensure a bright future.

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