Audit Improvements hindered by liability concerns
Pressure continues to mount to broaden the scope of the audit for a greater level of confidence in financial reporting, with Bahamian and international regulators and investors increasingly focusing on a risk-based approach to financial analysis.
The key roadblock to auditors taking on any added responsibility is the matter of liability, according to Ian Welch, Head of Policy with the Association of Chartered Certified Accountants (ACCA), commenting on a recently completed ACCA report,”Reshaping the audit for the new global economy”. The report found that auditors should report on risk, governance, the business model and other forward looking information.
“Stakeholders believe that auditors could, by way of their jobs, give an insight on what’s to come in the business, as well as any issues that might create a problem for the business,” Bahamian Institute of Chartered Accountants President Reece Chipman told Guardian Business recently. Chipman agreed with Welch’s assesment that the matter of liability had to be addressed first.
“Going forward we definitely need to discuss liability and that discussion needs to be with regulators, stakeholders and auditors. We need to see how we can manage or leverage the liability among the three areas to ensure that risk is priority,” Chipman said.
The ‘three areas’ Chipman referred to were the parties to the audit process–regulators, audit committees and auditors. Audit committees are operating committees appointed by a company’s board of directors to oversee financial reporting and disclosure.
The role of audit came under increasing regulatory scrutiny in 2010, according to the ACCA release.
“The fact that there had been some banking and corporate failures in which auditors had not been able to provide any warnings to stakeholders of looming problems was a cause for concern,” Welch said.”… there was a clear sense of frustration that more could be done to meet the stakeholder needs.”
The ACCA brought together investors, corporates, banks and regulators for a series of roundtable discussions this year, held in the UK, Poland, Singapore, Ukraine, Brussels, Zambia and Malaysia to address the future of audit.
The key findings from the report were summarized in the ACCA release and include:
1) Broadening the scope of the audit to better meet stakeholders’needs by including a statement of responsibility for reviewing risk management and governance arrangements, and the assumptions underlying the business model;
2) Greater communication of findings must exist to allow for’red flags’to be raised when necessary;
3) Reporting must evolve to include real time information;
4) Auditor liability must be addressed if any future change is to be achieved. Auditors should stand up for what is morally right;
5) More application of the ‘spirit’, not just the letter of standards is necessary;
6) Audit committees are critical to ensuring strong and effective processes for independence, internal control, risk management, compliance, ethics and financial disclosures;
7) Successful scaled-down audit processes are needed for small and medium enterprises(SMEs)as regulators continue to reduce their reporting requirements;
8) Dialogue between auditors and regulators needs to be strengthened.