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February 7, 2011

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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