It’s my favourite time of the year! Of course, Christmas, Easter, my birthday, EOFY parties, and end of audit season, all rank pretty highly as well, however the date that ASIC releases the annual audit review results is my favourite. The full report, which can be read here, certainly has some interesting facts in it.
Understanding how badly firms have stuffed up, and where exactly they have got it wrong, is great reading, but compared to other regulatory authorities (say the Financial Reporting Council (FRC) in the United Kingdom and the Public Company Accounting Oversight Board (PCAOB) in America), Australia’s report still seems a bit dull.
Firstly, our financial statement audits actually seem to be comparatively quite good. I am not saying the ‘fail’ rates arising from ASIC’s review are good, but they are certainly a lot better than the results from quality reviews performed overseas.
For instance, ASIC states that “in 20% of the key audit areas that we reviewed, auditors did not obtain reasonable assurance that the financial report as a whole was free of material misstatement.” This is down from 23% in the previous review period, showing that at least our audit quality is improving. Whilst a ‘one in five’ fail rate is hardly something to gloat about, we are doing better than our British friends who seem to be getting worse.
The most recent report issued by the FRC in the United Kingdom, stated that 27% of audits for FTSE 350 companies, were not considered satisfactory and had serious deficiencies. This is a decline in audit quality on the previous review period which showed only 19% of reviews were unsatisfactory.
What makes the FRC report (which can be read here), even more exciting, is it names and shames. The report calls out which firms lack good audit quality and even shows their performance throughout the review period. The report even singles out KPMG within it's executive summary as one of the most deficient firms.
The PCAOB in America goes a step further, having individual reports for firms reviewed during the year. A listing of all reviews undertaken by the PCAOB can be found here.
The findings identified from all three of the regulators is a concern. Furthermore, the frequent media reports highlighting audit firm failures over recent years, and their association with some high profile company collapses (Carillon), it really doesn’t paint our profession in a great light.
As a business, knowing the quality of the audit which you are paying for is paramount. Businesses pay good money for a regulatory audit which is relied upon for a range of reasons. Banks, investors, Government, and Shareholders, all place reliance on the audited financial statements. Failure for the statements to be materially correct can place a lot of people’s lives in jeopardy. As such, I think it is important that audit firms are named and shamed in the ASIC review to help businesses and audit committee’s make better decision about who they appoint as their auditor.
Interestingly, an article by the Financial Review quotes Matt Graham, PwC’s Head of Assurance, as wanting to work closer with ASIC to name firms and present a balanced scorecard, sighting it would help facilitate better discussions around audit quality. The argument is also supported by Deloitte, however interestingly, both KPMG and EY oppose identifying individual audit firms. Andrew Yates from KPMG mentions a range of tools and programs in place within the firm to ensure continuous audit quality.
The results of ASIC’s review, combined with events overseas and the results of other regulatory reviews (for instance, from the United Kingdom and America), clearly have the profession on edge. The Institute of Chartered Accountants Australia and New Zealand (ICAANZ) even posted on Facebook and Twitter regarding the ASIC results, acknowledging that ASIC continuously raises the bar. How the results will impact programs such as that offered by the ICAANZ, will be interesting to see.
Overall, it is clear the level of quality needs to raise across all audits if we are to remain a trusted profession and provide value to those we serve.