Danny Mccance 10 May 2018 08:41am

Good audit culture crucial to public interest

Firms need to create a culture in which high-quality audit is valued and wider society will benefit, says the Financial Reporting Council (FRC)

The value of audit has been brought back into the spotlight this year following the high profile collapse of construction company Carillion. It raised difficult questions for its Big Four auditors and advisors who were subsequently grilled by MPs.

The FRC’s first thematic review to specifically focus on audit culture covered the eight firms that have adopted its Audit Firm Governance Code. This includes the Big Four, plus Grant Thornton, Mazars, RSM and BDO.

It found that the key requirement was that firms’ brought into prominence “audit specific behaviours and values” within their “cultural design” such as “integrity, objectivity, independence and professional scepticism”.

The report also urged partners and audit staff to be aware of the societal value of good audits and how they are crucial to transparency and integrity.

The development of firms’ “root cause analysis” of what cultural factors contribute towards good and bad audits was also recommended, alongside monitoring how successfully they embed “desired culture” through more proactive assessments from non-executives.

It found that most firms recognised that multi-disciplinary firms contribute to cultural challenges, few “have clearly articulated those challenges or taken specific, explicit actions to address them”.

Focus groups suggested that auditing is under financial pressure with the demands on auditors growing but firms being unsuccessful at increasing or in some cases, maintaining their fees. “Cost and budget pressures may act as a disincentive to auditors doing the right thing,” said the review.

Investors told the FRC that the way auditors are remunerated may not promote scepticism, as “good auditing may incur additional costs that management are unhappy to pay”.

“There are many factors that influence the environment within which auditors make their decisions and act,” said Melanie Hind, executive director of audit and actuarial regulation at FRC.

This means it is vital that firms create an environment in which audit quality is held in high regard, she said, and that emphasis be put on “doing the right thing” for the better of the public.

“We found that firms have taken steps to achieving this,” Hind said.

“However, more should be done by firms to successfully promote and embed their desired culture, so that audit quality can be consistently and sustainably high,” she added.

Michael Izza, ICAEW chief executive, said the review “reflects the commitment that I see from audit firms, to the values and behaviours that drive high-quality audit.” He hopes that when the FRC carries out the review again in three years time firms “will see the dial has moved in the right direction.”

Izza added, “We still have some way to go, not just to look at what we can do differently to meet the needs of the societies we serve, but to regain the trust of those societies. We also need to do more to increase competition and choice for PIE audits, removing barriers to entry for those firms beyond the Big Four who currently view the risks involved as too great.”

The FRC also said that increasing shareholder engagement, as well as building confidence and trust, would be achieved through more extensive and transparent reporting – which the FRC itself has been called to do in recent months.

Last month, research from North America suggested that audit quality gradually deteriorates over the tenure of an auditor and that a longer audit tenure might allow misreporting to accumulate and increase.