When we consider audit reform, we have to place it in the context of audit failure. To know what to change we must start by looking honestly at where audit practice is currently not working. Wirecard and Patisserie Valerie are but two recent examples which slipped on vital data analysis which demonstrate one specific area of failure: cash fraud underpinning the accounts.
It’s easy to point fingers at junior accountants or individual organisations but considering that audit practice is largely the same across the entire industry, we must all take responsibility for maintaining the status quo that created the failure.
While uncomfortable, it does mean that we can – and we should – all take responsibility for creating change. With the results from the FRC’s review into the use of technology to improve audit imminent and the mandate on Managed Shared Audit already released, sweeping change has started, but before it snowballs, should the industry take a moment to better understand where to focus resources, investment and energy?
I believe it should. If we are to create change across the industry that works for the entire sector, then it must be a professional services owned and championed solution. Siloed solutions will just perpetuate the audit culture that has given us successive failure.
Calls for transformation are now pressing from outside the industry. Attracta Mooney’s piece in the Financial Times, which asks ‘Is Audit fit for purpose?’ has drawn input from various investor spokespeople from Schroders to Sarasin & Partners and experts from Harvard University, who are desperate to see change. Similarly, Michael Izza from ICAEW is clear that investors could play a huge part in future of audit: “Investors have enormous ability to change the market. One of the things the accountancy system would like is more investor dialogue.”
The opportunity here is enormous. It is imperative that those at the top of audit practice grasp it with both hands and engage with the industry and potential solutions, as well as financial or other investment, to drive the transformation forward; to own the change. The question is though, how can Audit Partners approach it?
Much of the discussion on audit quality improvement seems to be around box ticking within the current process. This will not drive us forward. My view is we have to move towards co-created innovation, where the focus must be on solving the needs of the audit end clients. This will in turn serve the investors, regulators and wider society.
The two fundamental elements to progress that we all must address immediately and urgently are to identify and eliminate the barriers to change in the industry; and reconnect with the ultimate end client of audit. To ensure we are fulfilling our audit responsibilities we must go beyond the audit entity.
The lazy view is that Partnerships are too slow to change. To some extent this is true; however, larger firms may find radical cross sector shifts daunting, due to their market position. The current top partnerships are now realising an accidental formation of two moats which protect their marketplace: one being their capability to access client data across the myriad of client systems, financial and beyond; the second being their available capital for technology implementations.
The industry-wide issues that come with this privilege is that, as more of the audit process is digitised, access to client data is becoming impenetrable for smaller firms. On top of that, the Big Four firms have collectively announced just under $10bn investment for digitisation, which will eventually lock out smaller firms and new entrants.
This dynamic can be solved with a common data model and cross industry standardisation. These solutions will also unlock innovation for all. If audit partners and firms engage with initiatives which are already in the market, that are committed to audit transformation, then cross-sector revolution will happen. The ways in which all stakeholders can engage are many: contribution to crowdsourced ideas, direct financial investment, or participation in the many ‘sandboxes’ that have been created to rapidly progress development, the options are readily available.
Ultimately, any firms or partners not seizing the chance will undoubtedly be left behind. I urge challenger firms to get on board as soon as they can; digitisation will lead to a level playing field and greater opportunity for smaller firms to play on an equal footing with the Big Six. This is a very exciting moment for all firms, large and small.
Building a fit for purpose, industry wide, audit practice will take a great deal of expertise and alliance. Understanding how to work together to bring lasting change must underpin the transformation. Then, in realising the future of audit, something like the Wirecard scandal will never happen again.