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Why we should be proud to be auditors

Covid-19 has required new approaches to audit and a total reassessment of risk. PrimeGlobal CEO Steve Heathcote offers IAB readers an insight into how the association’s members are delivering value to clients

Recent headlines about audit have not been good reading – dominated by high-profile audit failures and regulatory intervention to break up the big firms. With companies of all sizes under financial pressure, the value of audit is once more being challenged.

The audit is sometimes seen as a necessary evil, a compliance activity adding little value to a company or its stakeholders. This is captured by the old joke: Why did the auditor cross the road? Because they did last year! As an ex-auditor it does still make me smile. The reality, however, is very different. The crisis has required new approaches to audit procedures and a total reassessment of risk.

My recent discussions with PrimeGlobal member firms highlight that the crisis has increased their focus on understanding business risk, the impact on audit procedures and the audit opinion.

Many of our member firms’ audit businesses of differing size and across sectors – often small to medium-sized companies. They are used to complexity, and recognise that every client needs to be understood differently. As Elaine Pantel, partner – assurance and business advisory at Canadian firm Shimmerman Penn, explains: “The partners feel a higher sense of purpose as they realise how important the audit is during challenging times.”

Visiting clients

Clearly Covid-19 has limited the ability of audit teams to visit clients to complete audit procedures, such as inventory checks. The extent this has impacted audits varies depending on the time of the year end.

Anthony Woodings, business services partner at UK firm Hurst, explains that 30 March year ends were particularly challenging. However, Woodings notes: “We assessed risks, determining exactly when we needed to be at the client’s premises and what could be done remotely. For certain types of inventory, we could obtain strong assurance using collaborative technology. Often when teams go out to client locations, we have down times when they are waiting for information. By obtaining information in advance and really focusing on only visiting when we needed to, we reduced physical time spent at a client from a typical six weeks to six days.”

The extent of thought required is helping to focus audit work on key matters. Simply following previous audit procedures is not an option.

For both Shimmerman Penn and Hurst, previous investment in technology and moving to fully paperless operations has helped to ensure they were in a strong position to obtain information from their clients to continue audits.

Hurst started to adopt an AI auditing solution before the crisis hit. This foresight has proven to be incredibly valuable. Woodings explains: “The software has been great to analyse data to focus on audit risk, and the dashboard really helps explain issues to clients.” The crisis has clearly helped to accelerate the adoption of the technology.

Going concern

There is clearly an increased probability that auditors may need to highlight the existence of an uncertainty regarding a company’s ability to continue as a going concern.

For some clients, for example in the casual dining sector, the risks are so clear that clients have accepted the need to do so. However, for others the thought of any form of modified audit report is a shock. As Pantel says: “This is partly psychological – it’s a sense of pride – clients want a ‘clean’ audit report.”

The time partners spend discussing risks with their clients is helping them understand their own business position more fully. Bonnie Zelman, director – quality control at Shimmerman Penn, notes: “They help their clients understand that the financial statements belong to them – they need to assess the impact of financial uncertainty on their business.” This helps to bring an advisory element to the audit – but at the same time firmly maintains independence.

Firms like Shimmerman Penn and Hurst have invested in strong quality-control functions with senior staff like Zelman ready to support audit teams. This investment has helped keep a focus on independence during a time when there could be more pressure from clients. It also ensures that teams have access to high-quality advice issued from a range of standard setters and professional bodies.

Value of audit

Pantel and Woodings comment that they have had to invest more time in audits to consider challenging judgemental areas. Pantel notes that this is putting some pressure on the recovery of costs; however, the firms want to support their clients during challenging times and are reluctant to increase audit fees.

Both firms are passionate about their clients and want to help provide the insights which help them grow. Woodings comments that Hurst feels fortunate to have entrepreneurial clients that want help to understand their financial position, accept their reality, and are nimble and can refocus on growth. He says for some business owners this is motivating, and reflects the entrepreneurial spirit that is the driver behind many small to medium businesses. Such businesses represent the majority of economic activity, and puts the auditor in the critical role to build the confidence required to generate jobs and growth.

Pantel comments that the high-level discussions Shimmerman Penn is having with clients about their current and future business provides – in the longer term – an opportunity to “relook at the value of audit and turn the tide away from its commoditisation”.

The future

There are clearly challenges ahead for auditors; however, PrimeGlobal firms are highlighting that there have also been positives. They understand their clients’ business better than ever, and their clients have a better understanding of what is required to audit. Audit teams are learning from partners as they see how they address challenging judgemental areas and how to have difficult conversations with clients. This exposure is helping train and equip the next generation of auditors.

PrimeGlobal firms are also exploring further collaborative technology which will increase efficiency and effectiveness of audits – for example, by looking at the potential of augmented reality headsets that project computer-generated images and tools onto a visor in front of your eyes. The client would wear the headset to enable remote auditing so, for example, they could walk into a warehouse full of boxes, scan the room and the technology would tell the auditor in an instant how many items are there. It can also be used to review working papers remotely. In a day, an auditor could review working papers in Singapore, review inventory in Germany and remain at home in time for dinner in Manchester!

At PrimeGlobal we are committed to bringing our firms together to share practices to improve audit effectiveness, use technology, train staff and enhance audit quality. Post Covid-19, the need for audit will be stronger than ever, with stakeholders requiring assurance about the resilience of businesses. The value of audits may also be better understood by business.

The crisis has given us many reasons to be proud of our auditors. That would be a headline about audit that, for once, should make us all smile for the right reasons!

 

 

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