Preparing a company for an audit has been said to be about as much fun as root canal surgery or a coast-to-coast red eye flight. However, while the relationship between the company’s board, its finance director, its auditors and its audit committee has never been a particularly harmonious one, it is more pivotal than ever as everything from what companies pay for audit services, to what all stakeholders get back is under unprecedented scrutiny.
In the past year, we have seen significant scrutiny of auditors undertaking non-audit services for auditing clients – consultation on this is currently being run by the Audit Practices Board (APB) – while influential bodies such as the Association of Chartered Certified Accountants say they do not believe a separation of audit and non-audit services is either possible or desirable.
Weighing in for business, The Hundred Group of Finance Directors, in its response to the APB’s consultation, simply called for greater transparency – but no rules stopping their auditors undertaking non-audit work for them.
The audit committee, meanwhile, is in an evermore powerful position, not just in terms of assigning non-audit work to an auditor but in its ability to recommend and choose the auditor from the beauty parade that usually ensues when the incumbent’s term is coming to a close. As smaller audit firms gain ground and fight on price, the Big Four have to prove their worth more than ever before.
Perhaps it is these pressures on the sell side that explain the headline result from a survey on how happy FDs are with the service they get from their auditors, which Financial Director ran in association with KPMG. Of the 200-odd FDs who responded (from our readership and picked at random by us, not by KPMG) most tell us their relationships with auditors and their audit committee have improved in the past year.
The fundamental reason behind it, the survey says, was increased communication between the FD, the auditor and the audit committee and a heightened sense of working to a common goal. As a result, there has also been an improvement in the understanding of business, compliance and risk issues by audit committee members. The 84.5 percent who said their relationship with their auditor had either improved or significantly improved in the last year indicates how well these relationships have been managed on the whole.
“Auditors cannot afford to create blocks,” Oliver Tant, head of audit at KPMG, told Financial Director in response to the survey.
That does not mean all is rosy. Some 15 percent of FDs say they are unhappy with their current auditor with specific reference from respondents to the increasingly excruciating level of detail in the audit process. Others found errors in accounts the auditor had missed or found a general drop in the quality of the audit performed. One found their auditor sending staff over that the client had previously made complaints about.
As shareholders have lost confidence, the auditor’s role has become more challenging. When it comes to the beauty parade, competition between the large auditors is tough and the traditional areas in which they joust – cost and reputation of the firm as well as the lead auditor that will head up the team sent in to undertake the audit process – have been added to of late. FDs who responded to our survey say the most important qualities an auditor should offer now are speed – the time it takes a firm to respond to the client in need of accounting guidance, which nearly 15 percent of respondents say is a headline issue for them. In addition, 19 percent of respondents tell us that insight into emerging markets is near the top of their wishlist for auditors to improve, more than those who were asked in the same question if they wanted to see more fees become more competitive.
Of course, the dominance among FTSE-100 companies of the Big Four as auditor remains strong. But all this could be about to change, according to David Evans, senior partner at Mazars. Commenting on the results of a survey on audit quality run recently by the publisher of Financial Director and revealed in our sister title Accountancy Age, Evans says that mid-tier firms “punch way above their apparent weight and can more than match up to the perceived performance of this group”. This means that FDs can look forward to increased levels of competition from audit providers – which could also increase standards in the areas in which they wish to see an improvement.
The majority of participants want greater assurance in two areas: compliance with industry regulatory bodies and compliance with the whims of the taxman. Not surprising given the amount of regulatory movement post-recession. That said, nearly half say they did not anticipate expenditure on that to rise: so either they will be looking for a cheaper, more effective auditor, or they will be squeezing their current one to do more for less.
We also asked FDs to tell us about the relationship they had with their audit committee and how the relationship might have changed in the past two years. Sixty-three percent say it has stayed the same – but another 25 percent say it had improved somewhat. Only 5.1 percent report it as having deteriorated. Many report their audit committees are now better acquainted with their business on the ground and have a greater respect for the job of the FD as a result of better communication.
Comments from FDs include: “In-depth understanding and a realistic approach to impairment”; “supportive and providing good quality advice during poor economic environment”; “greater understanding of our industry and prompt guidance from the auditor on ethical issues”; “good communication and learning curve on both sides”; and “there is trust and professionalism in our dealings and mutual respect.”
This year is certainly shaping up to be an interesting one, particularly in terms of the outcome of the conversation over the award of non-audit work to auditors and where the boundaries should lie.
Whatever else the results have revealed, we have found that FDs now have an opportunity to review what they pay their auditor and what they get for their money; and whether their current auditor can be haggled with – or whether it is time to look for a fresh, perhaps more economically competitive view.
You can read the analysis of the recent study on audit quality here