There is a constant murmur of discontent about auditors in corporate governance circles, but recent proposals have placed a spotlight on the non-executives staffing audit committees. A new report will do little to reduce the glare of that attention.

A survey for the UK’s governance regulator finds some audit committee chairs struggle to tell the difference between audit quality and the auditor’s service, and they have a negative perception of joint audits—a key proposal to reform the sector.

The conclusions come in a report by the polling agency YouGov on behalf of the Financial Reporting Council. The report finds: “It was not always clear that [audit committee chairs, ACCs] distinguished between good quality of audit and a good quality of service from the auditor.”

And while there is concern among ACCs about the lack of choice between auditors, “there is a negative perception of joint audits solving this problem”.

Investors are most likely to be concerned about the findings, given they rely most on audits, but the report may also raise concerns for regulators and policymakers currently considering reform of the audit sector.

Audit quality and service

Audit committee chairs offered a range of views on the issue of quality. One chair told researchers they were looking for independence in an auditor.

“You know, if you have a client who pays you a million a year in audit fees, you think very carefully about whether you want to upset that client by insisting they have to provision or disclose something… Independence of spirit and independence of analytical investigation, and the required toughness you have to have, is quite an important aspect of a good audit,” they said.

Other ACCs explained quality as “planning”. One said: “We need good planning of the audit and the identification early on of the key areas of audit. And then good project planning, so that they project plan it all the way through to the end.”

Some focused on people. “It’s down to the quality of the staff involvement and the relationship that they can build with you, and you with them; and that starts at the top, with the partners and the level of trust you can build with the partners, not only as the audit chair but also the CFO with the audit partner as well…”, one ACC said.

Others wanted an early warning. “I’d much rather people actually told you stuff and flagged it in advance and then helped us to manage it, rather than just jam a surprise in a meeting and then it’s daggers at dawn at the last minute…”

But some struggle to draw a line between service and quality. One ACC said: “I don’t think there’s really much difference, no. I can’t see myself saying I’ve had a good quality audit but the service has been rubbish. I wouldn’t have had a good quality audit if the service had been rubbish, to me they’re almost together.”

Another ACC commented that quality was marked by the “challenges and questions” reported back to the audit committee. If an auditor fails to report anything, they added, “we would be worried about whether they were carrying out their job properly”.

Regulator guidance on audit

The report comes at a time when reforms are being considered not just for the audit market, but also for audit committees.

Proposals contained in a government white paper issued last year suggest minimum requirements for audit committees and new powers for regulators to monitor audit committee performance, collect information from them and impose sanctions on those who fall short. Audit committees could also be ordered to collect views on the audit process from shareholders.

Observers are not entirely surprised by the confusion between audit quality and service levels. According to Mike Suffield, professional insight director at ACCA, the distinction can be difficult “in practice”.

“We would argue that the focus should be on the quality of challenge and the insight provided by the auditors. But many elements of a ‘good service’ … will also be supportive of good quality audit.”

And while audit committee chairs in general have a fix on what audit quality means, Suffield believes they could do with help in the form of more guidance from regulators “on how they should deliver their responsibilities, and oversight from the regulator when this is not happening”.

A long-running issue is the lack of audit choice. And yet audit committee chairs dislike the option of joint audits. One ACC described the secondary auditor they witnessed in France as being “clueless”. The government has expressed preference for a “shared audit” approach, where part of an audit is outsourced rather than joint responsibility.

While any legislative proposals based on the white paper are yet to be revealed, it seems clear audit committees face significant change. Some of that may help them focus on the difference between audit service and audit quality.