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March 2, 2011

Editor’s letter: A debate well worth having

 

Arvind Hickman comment

The EC’s Green Paper on Audit Policy was the centre of an engaging
round table debate in Central London late January (see
Audit round table:
The evolution of the auditor
).

The International Accounting
Bulletin
was joined by some of the top public policy experts
from the accounting profession, with a good balance of views from
the Big Four and the mid-tier.

All broadly agreed that one of the
major issues facing the industry is closing the expectation gap
between what the public thinks an auditor should do and their
actual jobs.

This expectation gap can be closed in
two ways – auditors could do more work during each engagement to
provide higher levels of assurance, or public expectations could be
managed down through better education.

Who will pay for
it?

Increasing the scope of the audit
needs to be carefully considered for several reasons. Firstly, a
more forensic style audit will add considerable cost – does the
market want to pay for it?

Secondly, it would alter the nature of
the relationship between auditor and client, which could, arguably,
affect the quality of the end product.

Thirdly, it is impossible to provide
100% assurance on anything in life, and inflating expectations even
further could merely exacerbate the fall when auditors fail to
uncover fraud. Auditors do not carry a magical crystal ball in
their back pockets and are unlikely to inherit these powers anytime
soon.

A couple of good ideas the panel put
forward involve injecting greater transparency in the audit
process. For example, audit committee chairs could disclose more of
the important discussions that take place with auditors within the
annual report. This provides more meaningful information about the
audit process that goes beyond the formulaic auditor’s report.

There was discussion about the role of
the audit committee and whether this should be strengthened. Too
often in debates about auditors, the importance of improving
corporate governance is ignored. It is crucial the audit profession
takes a leading role to ensure corporate governance is on the
agenda.

Another common theme was that the
communication between auditors, investors and other stakeholders
could be improved, but this must be a two-way discussion.

To be, or not to
be

The debate moved onto the audit
industry – how to mitigate against a Big Four collapse and whether
the industry should be dynamised.

This publication does not believe
there is a systemic risk if a Big Four firm collapses but
contingency plans should be discussed as a sensible safeguard to
any potential disruption.

But should the audit industry be
dynamised, and how?

This is the question that divides the
audit industry like no other. The Big Four maintain that there is
plenty of competition at all levels and it is unrealistic for
non-Big Four firms to audit the very largest multinationals. The
mid-tier believe it is subject to market discrimination,
which hampers firms’ ability to grow.

I would encourage International
Accounting Bulletin
readers to consider both points of view
and try to look beyond commercial interests pulling from both
directions. There are some easy wins that make sense and would help
dynamise the market, while there are other more ambitious ideas
that could cause more damage than good.

Regardless, the debate is well worth
having and one I am sure you will enjoy as much as I am.

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