Opinion
28 Feb 2014 04:06pm

Can audit deliver trust?

In February, ICAEW, through its AuditFutures project, and the Royal Society of Arts launched a report Enlightening Professions? A vision for audit and a better society. The paper was designed to start a public debate. It answered no questions but posed challenges as to the purpose of audit, in its widest sense

Inevitably at the launch of the report, the debate was drawn back to financial audit and to the perceived failures of financial audit, coloured by, of course, the banking crisis. Audit is a product intended to add trust to what Pooh-Bah would have described as “an otherwise bald and unconvincing narrative”. And there is no doubt that, at times, that product has failed to deliver. But does the real failure in trust go deeper than that?

Audit can only function on what it is auditing. Financial audit (which is what most people think of as audit) adds trust to financial statements: but if those financial statements are measuring the wrong things in the wrong way, no matter how trustworthy the result, the output will not help society as a whole. Any examination of the societal value of audit needs to go back further and look at financial reporting standards and what they achieve.

Just as society changes reporting, what we report and how we report it changes how people act and that changes society itself

Financial auditors could, if the constraints placed on them were removed, help considerably in this process – but when as anybody seen an audit report which said “These financial statements are as true and fair as they can be under the circumstances, but they could be a lot better if we ignored this standard”?

 Indeed, if anything both auditors and preparers of financial information have been hampered over the last few years by the almost religious insistence that standards must be right.

There could be a lot to be said for an environment where the true and fair override was used more frequently to ensure that financial statements are meaningful to their intended audience and to having a “comply or explain” mentality, rather than dogmatic rules, applied to both accounting and auditing.

Of course, the audit process itself can, and should, be applied to reporting areas outside pure financial reporting as we now have it. Indeed, some audit and consultancy firms already do so and there are audit tools available to be used in a wide range of activities as human resources, water management and quality control. If the corporate (or society’s) will was there, the audit process could be applied to reporting on a wide range of ethical and social issues. Let’s start by having it applied to CSR statements. It will be interesting too, to see how the new ideas in integrated reporting help to provide auditable benchmarks for social issues, but I suspect this is some way off.

In all of this however we get back to the same point about standards – it is difficult for any audit to provide the trust people need, and on which they can reliably base their actions, unless the underlying information is itself not only “true and fair” according to the rules, but true and fair in its own right. “Honest” if you prefer. And that requires some underlying agreement on the purpose of the reporting.

Such a debate is invariably littered with words like “needed”, “good”, “best for society”, “resolving problems” - and this is important, because reporting is not a passive thing.

Just as society changes reporting, what we report and how we report it changes how people act and that changes society itself.

So, whilst we can make incremental changes to improve trust through better auditing processes, before we can make big changes, we need to ask ourselves what we mean by “good” and what we want society to be. Only then can we derive measures, write standards and prepare information which will mesh with the aims of society and only then, properly audited, will we have reports that people can trust.

 


Malcolm Bacchus is the principal of Baccma Consulting, an accountancy and consultancy practice, and an ICAEW council member

 


 

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