Audit in the UK is contentious. As soon as a corporate scandal comes along then the finger pointing starts and after company directors, including non-executives, it is often the auditor who comes under closest scrutiny.
And since the financial crisis there has been an increased focus on audit and auditors as questions emerged asking whether they could have done more to warn of impending trouble.
The European Commission reacted with new legislation bringing in the EU Audit Directive this year, which capped fees for auditors from non-audit services, limited the alternative services they can provide to audit clients and restricted the time over which an audit appointment can be held.
The legislation also defines new responsibilities for audit committees, which include running a fair tender process and ensuring that smaller audit firms are not excluded from pitching for an audit.
That’s the backdrop for the Financial Reporting Council’s (FRC’s) latest audit confidence report conducted by the research firm YouGov. And while things are improving, respondents have given clear signals on issues they believe need attention.
The FRC concludes that investors remain concerned whether auditors will “challenge management”; respondents worry that the increasing complexity for large business means the Big Four audit firms will continue to control the market; and the shift to data analysis as the basis for audit prompts concerns about regulators and small audit firms keeping pace with the rate of technological change.
“The report finds that, while being a trusted adviser to a company is seen by firms and companies as potentially beneficial, investors question whether the auditor will challenge management and report their concerns,” says the FRC.
It adds: “…new and forthcoming changes around capping non-audit services and mandatory retendering or rotation are welcomed but the fear is that the increasing complexity of audit for larger businesses and public interest entities (PIEs) means that the dominance of the Big Four will not change.”
One audit committee chairman told researchers: “I think the fact that they still only have four big firms doing most of the major audits, and most of the audits with PIEs, is not a good thing.
“It would be better to have more and therefore I would want the mid-tier to up their game a bit and be able to claim that space.”
Technology was also an issue. The FRC said: “The future of audit looks to respondents as though it will be increasingly based on technology and data analysis capabilities.
“This raises further concerns about how smaller firms will be able compete, what the role is for the auditor, and how regulators and standard setters will be able to keep up.”
That said, the FRC reports that the chairmen of audit committees remain “overwhelmingly positive” about audit quality. Chairmen rate quality 5.9 out of seven compared with 5.8 in the previous report.
The YouGov report found a lot of support for non-financial reporting but also found a small number of people with strong doubts.
One respondent told researchers: “I think auditors have a really important part to play in enhancing the trust of that non-financial information. It is that non-financial data, that complete picture that builds the trust and integrity in the financial markets.”
But misgivings were not far away. “I’m sort of averse to this,” said another respondent. “I think it all can be done. An audit monitor can report on employees, and diversity, and KPIs and that sort of thing.
“I wonder why we need that in place … the cost is not really justified. So, I’m not in favour of extending their lines of obligation.”
Viability reports, however, were already viewed by some as a “valuable” document.
One investor said: “The viability report is a valuable thing to have … we can look at the end of the year to say: ‘Do we think it’s valuable in this format or do we want to encourage some further reporting?’ … I think as we work through and develop, companies will hopefully say a bit more.
“The enhanced auditor reports were in a similar state a couple of years ago and auditors have been trying to work out how best to do it.”
Concerns were also voiced at the lack of consistency in non-financial reporting, something the researchers expected. One respondent said: “I think in the non-financial reporting area there are attempts to formulate standards but those are very much undeveloped still.
“So, to be able to audit something, you need to have a clear standard against which you can audit it … that’s a challenge for auditors from a practical point of view.”
Another observed: “Share owners would be very keen to see non-financial reporting.
“The problem is not being able to benchmark across companies though, as non-financial reporting is not consistent; what are the sensible metrics, what does good performance look like?”