Audit firms need to pursue initiatives to improve audit quality and the consistency of audit execution, the International Forum of Independent Audit Regulators (IFIAR) chair Lewis Ferguson warned yesterday at the launch of IFIAR’s 2014 survey of inspections findings.
IFIAR’s third survey of inspection findings amongst its members showed similar results to the previous two surveys. In Ferguson’s words the survey shows persistent high level of deficiencies in the audit of listed companies around the world.
"This is problem for investors and other users of financial statements around the world," he said.
Thirty IFIAR members submitted results primarily from inspections of audit firms affiliated with the six largest international networks: Deloitte, PwC, EY, KPMG, BDO and Grant Thornton.
"Of the 948 audit files from listed Public Interest Entities (PIEs) inspected, 47% had at least one finding reported," Ferguson said. "Of the 148 audits of systemically important financial institutions (SIFIs) inspected, including global systemically financial institutions, 40% had at least one finding."
IFIAR survey revealed that the areas with most deficiencies in the audits of PIEs relate to internal control, auditing fair value measurement and auditing revenue recognition.
The audits of SIFIs showed more deficiencies in the areas of internal control testing, auditing of the valuation of investments and securities, and auditing of allowance for loan losses and loan impairments.
Ferguson mitigated those findings saying that a deficiency doesn’t necessarily mean the audit of the financial statement themselves were materially misstated.
"It means there is not enough evidence to know with assurance if the financial statements are materially misstated, these findings go to the quality of the work done," he said.
IFIAR vice chair Janine van Diggelen said that in order to substantially improve the outcome of the survey, audit firms had to carry out root-cause analyses. "A well performed in-depth root-cause analysis will provide the firm with a thorough understanding of the factors that underline these findings, which includes the cultural and behavioural influences relevant to the deficiencies."
The launch event took place in London during IFIAR’s annual conference on audit quality hosted by the UK Financial Reporting Council. As the findings and recommendations of this year’s survey replicated those of previous years The Accountant asked what was needed in practice to see some improvement in future surveys.
"The root-cause analysis is probably the most important thing," Ferguson replied."The firms need to try understanding at a very fundamental level what is preventing consistently high quality report. This is really a question of consistency of execution it is not a question of the fact that the firms don’t know how to perform high quality audit, they do."
Van Diggelen pointed out that firms have already started their root-cause analyses and to put in place some actions to improve audit quality.
The survey, however, looked at audits which happened between 2010 and 2013, she pointed out. "These outcomes not necessarily show the actions that the firms are currently implementing or have started to implement."
These are early stages in the development of this kind of analysis, Ferguson said. "I would hope that over the next few years we will see some improvement."