Future of audit – “The (in)visible cost of audit quality”
Visibility is often defined as how clearly objects can be seen, or how far you can see clearly, usually because of the weather conditions. But is there a way to (metaphorically) relate weather conditions to audit quality? Based on the in January presented reports, it is clear that if any comparison should be made, we have had some heavy rain showers. The proposed measures by both commissions (MCA and CTA) should eventually result in sunny spells, but the question is if the public interest still has a clear view on how audit quality should even be defined.
The evolution of the auditor
The objective of an audit has been the same for decades. It has always been the purpose of an audit to enhance the degree of confidence of intended users in the financial statements. This is achieved by the expression of an opinion by the auditor on whether the financial statements are presented fairly, in all material respects, or give a true and fair view in accordance with the framework. However, the way an auditor carries out his audit, evolved throughout the years. Where manual accounting evolved into digitalized environments and hardcopy files converted into digital files, laws and regulations were established and audit standards were developed. As most people know, accounting scandals led to a significant increase of rules for auditors. However, professional judgement and skepticism will always remain important.
Professional judgment and skepticism of the auditor
To express an opinion it is necessary to apply professional judgement. This is done by applying training, knowledge and experience in making decisions. Skepticism is the attitude that includes a questioning mind and being alert throughout the audit. Many reports by the Authority for the Financial Markets (AFM) concluded that auditors insufficiently showed the required professional skepticism. Although the audit profession itself focused on improvement of this aspect, both the MCA and CTA believe that several measures should be taken into consideration in order to sustainably increase the quality of audits.
Measuring the audit quality
If all the stakeholders of an audit were to be asked about their definition of audit quality, most will have a different opinion. The CTA defined an audit as a so-called “credence good”. The quality of a credence good is difficult for a buyer to observe, measurable or compare between providers. Clients however often value a proactive auditor, with a certain amount of attention and professional skepticism to help a client to improve for example their internal control environment. Furthermore, as long as the process is clear, most clients are open to the developments of the audit profession and tend to understand the public debate, for example on proposed measures to improve the quality of audits. As most know, several countries are now (re)considering the audit quality, and it is expected that the set of rules that apply will increase and/or change in the upcoming years.
Future of audit
It is expected that the audit market will change. But what would it mean for your company, registered in The Netherlands? We at Crowe Peak inform our clients and we could inform you in depth on possible changes and the impact for you company. If you have any questions on the future of audit, please contact us.