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April 29, 2014

Stakeholders far removed from the audit process most likely to call for change

By Vincent Huck

There is a relationship between the level of involvement that financial stakeholders have with the audit process and their overall confidence in audit, a research has found.

The research entitled, Improving Confidence in the Value of Audit, carried out by YouGov for the UK Financial Reporting Council (FRC), has highlighted three categories of stakeholders based on their level of confidence in audit: the high confidence stakeholder groups, the medium confidence stakeholder groups and the low confidence stakeholder groups.

The research concluded that stakeholders closely involved with an audit show a high level of confidence in the audit process, and they are the least likely to advocate structural reform. Those stakeholders include for example financial directors, audit firms and accounting bodies.

For this group the main issue affecting their confidence in the audit process is the dominance of the Big Four which they say stifles innovation. The research states that these stakeholders believe confidence can be improved "through a more competitive and dynamic market rather than policy intervention".

The second group includes the stakeholders who are not directly involved in the audit process but have a direct interest in its outputs, for example regulators, investors, accounting bodies and politicians. These show a medium level of confidence in the audit and are likely to ask for structural change such as mandatory audit rotation and capping of non audit fees.

"This group differs from the high confidence group in that they see the current independence of auditors as a significant issue, which is exacerbated by the dominance of the Big Four," the research states. For these stakeholders the solution for greater confidence in audit comes from policy interventions to tackle transparency and independence.

Finally, the third group is constituted of stakeholders who are not directly involved in the audit process such as journalists or academics but also some investors. They show a very low level of confidence towards audit and are the more likely to ask for structural change to the audit process. Like the stakeholders in the medium confidence group they believe that the main issue affecting audit confidence is the current market configuration which prevents "true independence".

But unlike the stakeholders from the other two groups they advocate large scale structural change to the audit process. Arguing that a rethink of "how audit can best deliver benefit to society and key stakeholders is necessary".

The research based its findings on interviews with 36 stakeholders covering politicians, regulators, investors, associations, journalists, academics, NGOs, audit committee chairs, commissioners of audit, auditors and accounting bodies.

Related link:

Improving Confidence in the Value of Audit

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