Do you remember back to the simple times before the pandemic, when we just had Brexit to worry about? The audit profession, and the big firms in particular, were rocked by a number of high profile business failures, from BHS to Carillion to Patisserie Valerie.
These failures brought the whole audit process into focus and led many to question the value of the opinion given by the auditors, and the efficacy of the work undertaken. The weakening of trust in the audit process also weakens the trust in the financial statements that are being presented.
What is an audit opinion?
It is important to remember that it is the directors’ legal responsibility to prepare financial statements that show a true and fair view. The auditor must then form an opinion as to whether they agree that the accounts do indeed show a true and fair view.
This opinion is given to the company’s members and no one else, but the accounts and audit opinion are publicly available and the auditors’ opinion should not be given lightly.
Does a business failure mean audit doesn’t work?
An audit is not supposed to prevent a business from failing and a clean audit opinion cannot guarantee that a business will not fail. Companies can run into issues for all sorts of reasons, some completely unexpected and impossible to predict. The difference with some of the cases that hit the headlines is that the audit process could and perhaps should have picked up on a number of the issues that resulted in the failure of the business in question.
This does not mean that the audit process doesn’t work, it just means that it wasn’t well performed in these cases. It is important not to throw the baby out with the bathwater, but it is equally important to remember to pop the baby into the bath in the first place.
The right answer must be to ensure that audits are carried out with due care and diligence to ensure that the sector can rebuild the confidence it has lost.
So what has changed?
As with all things in the modern world the first response seems to have been lots of consultations and navel gazing. Fines have been levied and some changes have been made to both the auditing and ethical standards.
There is a review of the regulatory and oversight role. The danger with all such reviews is that we end up with a rebranded entity, with all the same people just wearing different badges and expect that to drive positive change.
These are also specialist areas and the regulators will probably have trained and worked at the firms that they are now expected to regulate. Which then begs the question: does the regulator really have the teeth to bite the Big Four?
Reasons to be optimistic
When something fails you realise why it is important and the industry must learn its lessons.
The revised standards should strengthen the quality of the audit process as long as they are complied with. It is much easier to measure non-compliance with a standard than to question a professional judgement.
As a profession it is within our power to drive the change and demand improved standards and that is what must happen.