Preserving capital market confidence through audit quality

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The Institute’s new publication, Preserving capital market confidence through audit quality, is based on research into the audit practices of major accounting firms in Australia. It assesses the …

The Institute’s new publication, Preserving capital market confidence through audit quality, is based on research into the audit practices of major accounting firms in Australia. It assesses the perceptions of the main drivers of audit quality in the firms, including professional scepticism, the sustainability of the profession, effectiveness of communication, and audit committees. A variety of respondent groups were involved, including partners, managers, newly qualified accountants and graduates.

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  • 1. Preserving capital marketconfidence through audit quality
  • 2. Disclaimer The research referred to in this document is not anInstitute of Chartered Accountants Australia audit of the practices or files of any members of the Institute of Chartered Accountants Australia. The information in this document is provided forThe Institute is the professional body for Chartered Accountants in general guidance only and on the understandingAustralia and members operating throughout the world. that it does not represent, and is not intended to be, advice. No warranty is given to the correctness of the information contained in this document orRepresenting more than 70,000 current and future professionals its suitability for use by you. To the fullest extentand business leaders, the Institute has a pivotal role in upholding permitted by law, no liability is accepted by the Institute of Chartered Accountants in Australia forfinancial integrity in society. Members strive to uphold the profession’s any statement or opinion or for an error or omissioncommitment to ethics and quality in everything they do, alongside an or for any loss or damage suffered as a result ofunwavering dedication to act in the public interest. reliance on or use by any person of any material in this document. Chartered Accountants hold diverse positions across the business Copyright © The Institute of Chartered Accountants in Australia 2012.  All rights reserved.community, as well as in professional services, government, not-for-profit, education and academia. The leadership and business acumen of This report, and all matter or informationmembers underpin the Institute’s deep knowledge base in a broad range contained in it, must not be communicated to any person, unless compelled by law. Thisof policy areas impacting the Australian economy and domestic and does not preclude a participating firm from using,international capital markets. reproducing or communicating this report within that firm, to regulators or other professional accounting bodies, or discussing experiencesThe Institute of Chartered Accountants Australia was established by gained during the review with any external advisersRoyal Charter in 1928 and today has around 60,000 members and more or with fellow practitioners.than 12,000 talented graduates working and undertaking the Chartered This report and its contents may not be used forAccountants Program. publicity or promotional purposes, without the prior written consent of the Institute of CharteredThe Institute is a founding member of the Global Accounting Alliance Accountants in Australia and Beaton Research & Consulting (which may be given or withheld in their(GAA), which is an international coalition of accounting bodies and an sole discretion).800,000-strong network of professionals and leaders worldwide. Participating firms are reminded of their obligations under the confidentiality agreements entered intocharteredaccountants.com.au with The Institute of Chartered Accountants and Beaton Research & Consulting with respect to this report and the research on which it is based. The Institute has also agreed not to communicate information in relation to individual firms arising out of or obtained during the course of the research which resulted in this report, to any other party, unless compelled to by law. The Institute may publish and discuss the review approach and the results arising from the research, in relation to all the firms as a group, without identifying any individual firms. Prior to publishing the results arising from the research, the Institute will provide a draft to the firms to review for accuracy and prejudicial information. Information obtained during the course of the research, which does not relate to audit quality, such as university/Chartered Accountants Program details, may also be used by the Institute for other purposes, unless restricted by law. First published October 2012 ISBN 978-1-921245-98-5 Published by: The Institute of Chartered Accountants in Australia 33 Erskine Street, Sydney, NSW, 2000 ABN 50 084 642 571 The Institute of Chartered Accountants in Australia. Incorporated in Australia. Members’ liability limited.2 Preserving capital market confidence through audit quality
  • 3. ForewordThe complexity and dynamic nature of business today presents constantchallenges. Auditors are operating in an environment where economic conditionsare uncertain and users of financial reports are increasingly demanding of morerelevant and useful information. Now more than ever, the independent audit iscritical to investor confidence in capital markets.Preserving capital market confidence through audit quality presents a summaryof benchmark data from the Institute’s Audit Quality Research 2012 into the auditpractices of five major accounting firms.Using online quantitative research, we assessed the perceptions of variousrespondent groups (partners, managers, qualified Chartered Accountants andgraduates) on the firms’ commitment to the drivers of audit quality. By sharingwith the firms this benchmarked data we’ve provided them with valuable insightsinto the effectiveness of their quality systems, assisting them to promote internalattitudes towards audit quality.In this paper, we are pleased to present key messages resulting from thisinnovative approach. Our objective is to work with the audit profession to promoteimprovements in audit quality and help reinforce the value of the audit function.My sincere thanks to the firms who took part in this research – Deloitte, Ernst& Young, Grant Thornton, KPMG and PwC – for working with the Institute todemonstrate leadership in audit quality.Craig Farrow FCAPresidentInstitute of Chartered Accountants AustraliaPreserving capital market confidence through audit quality 3
  • 4. ContentsExecutive summary 5Audit quality – a new approach 6Sustainability of the profession 7Professional scepticism: Art, science or both? 8Communication: Latin “communis”, meaning to share  10A pillar of corporate governance: the audit committee  12Influencing the profession  13Resources  154 Preserving capital market confidence through audit quality
  • 5. Executive summary “Be a yardstick of quality. Some people aren’t used to an sustained viability of the audit profession is critical and in environment where excellence is expected.“ particular attracting, retaining and developing the right people for the profession Steve Jobs • Professional scepticism is a state of mind. Today publicThe global financial crisis coupled with recent corporate expectation is arguably at its strongest levels that all businesscollapses has prompted a string of inquiries into the role of professionals, directors, advisors, accountants and auditorsthe different operators of the capital markets. Regulators, have that state of mind and are able to demonstrate it. Butgovernments, academics and the audit profession itself are this is not simple or straight forward. Our analysis of theall asking challenging questions about the integrity of financial research data shows clearly that auditors at all levels withininformation. The purpose of the high quality external audit is a firm are fully aware of the importance and implications ofto provide assurance to investors, in particular, so that they professional scepticism to the quality of their work. It is frontfeel confident in the stewardship of management and can and foremost on their mind. Still more can be done by thetrust in the financial information on which they base decisions profession and the firms to nurture and engender professionalto invest. judgement and scepticism to sustain the delivery of quality auditingAs part of our co-regulatory function in overseeing andmaintaining quality within the audit profession, we (in 2010) • An evolution continues around the audit profession and theconducted an analysis of quality review as a concept, both skills set required by auditors. These changes are linked to ain Australia and internationally and thoroughly explored complexity and dynamic nature of business today, the waythe future direction of quality review1. Four evolutionary capital markets operate in a globalised market place and theprocesses [education, compliance, mutual recognition, and general economic environment. Effective communicationtransparency] were identified as the core elements of the is fundamental to the audit process and a quality audit. TheInstitute’s Quality Review Program. Each of these elements research data indicate skills and competencies traditionallysignified crucial milestones in the Program’s history and also regarded as ‘soft’, such as communication, are really the trueintrinsically aligned to our commitment to best practice and drivers of audit qualitycontinued evolution. • Quality external auditing is integral to capital marketBut for major firms, in particular, we needed to fundamentally confidence. Engagement partners supervise audits thatredesign the review approach. The decision was then taken span continents and oceans. Effective audit is enhancedthat to remain relevant and avoid duplication, an innovative by the mutual respect between auditor and auditee. Theapproach was needed to augment the work conducted by auditor’s communication with the audit committee is movingregulators and the firms themselves. Importantly, we wanted decisively from a compliance-based dialogue to the directionto add immediate value to the firm being reviewed. of meaningful, effective interchangeOur view was that while detailed inspections of work were • The financial audit is the linchpin for upholding confidenceimportant, a deeper understanding of the auditors’ mindsets in the capital markets. Our research marks the first majorto the key drivers of audit quality was missing. Understanding research of auditors within major firms and augments thethese mindsets was key to the continuing development of rigour of inspections conducted by regulators and the firms’audit quality. internal review processes.From this premise, we took the initiative to develop Audit The audit profession is in a prime position to drive financialQuality Research 2012, quantitative research of auditors of integrity in the interest of society. The Institute, in turn, hasthe major firms aimed at assessing the importance of the a responsibility to continually challenge the different cultureskey drivers of audit quality in those firms. This paper provides within the profession. Our intention is to extend this researchkey research findings and analysis of the responses received methodology to other firms within Australia and potentiallyacross the participating firms and also sheds light on our in other jurisdictions. The message is clear: we will innovatework to reinforce public confidence in the quality of external and continue to invest time and effort in preserving capitalauditing in Australia. The key research findings include: market confidence through continually improving the quality of external auditing.• Quality external auditing is integral to the effectivefunctioning of our capital markets. It is an essential servicerequiring specialist skills and knowledge. Therefore, the1. Quality Review: past, present and future, Getting the balance right, 2010, Institute of Chartered Accountants AustraliaPreserving capital market confidence through audit quality 5
  • 6. Audit quality – a new approach “Change will not come if we wait for some other person or to reinforce public confidence in the quality of auditing in some other time. We are the ones we’ve been waiting for. Australia. We are the change that we seek.” The research has been designed to seek the views of Barack Obama partners, managers and qualified Chartered Accountants on the drivers of audit quality3, with graduates responding toRegulation of the audit profession has moved a long way questions on skills and competencies. In total, 1,702 partnersin a small number of years. Traditionally, only professional and staff at the participating firms were involved in theaccounting bodies conducted reviews of auditors’ work research from a total of 5,050 invitations. The research wasas a requirement of membership. The United States’ conducted on an anonymous basis with participants offeringSarbanes-Oxley Act of 2002 established the Public Company an unbiased view without any incentive or disincentive. FromAccounting Oversight Board to oversee auditors of public the responses, a benchmark report details the data by firm.companies following the Enron collapse and other corporatefailures. This was a watershed moment for the profession: By sharing with the firms benchmark data about theirHere was a government body that not only produced responsiveness to the drivers of audit quality, the researchstandards but had a primary responsibility to inspect the provides firms with insights into the effectiveness of theirauditors of public companies in order to protect investors and quality systems, and helps promote internal attitudes towardsthe public interest2. audit quality. Conducting and examining the research in a much shorter timeframe than traditional methods of auditMost major financial markets have since created and inspections allows the participating firms to respond andappointed regulatory bodies with powers to inspect auditors. employ any level of remediation in a timely manner that willIn Australia, audit regulation activities have developed only add to audit quality.significantly since the introduction of enhanced regulatoryrequirements for auditors in July 2004, the issuing of legally Our review approach placed reliance on ASIC’s Auditenforceable auditing standards in July 2006 and amendments Inspection Program and the firms’ national and internationalenabling greater co-operation with international audit reviews, together with examining any remedial action takenregulators in July 2007. by the firms. We will work with the firms to correlate findings from the research with issues arising from their internalWith the commencement of the Australian Securities review program and the ASIC inspection. Supplementary toand Investments Commission’s inspections in 2005 and this, we will assess whether this approach can be adapted forthe establishment of the Audit Quality Review Board, we other practice areas within the firms other than audit, basedreconsidered our review approach for the major firms who on a risk assessment of the type of work undertaken and thewere subject to reviews by ASIC, the AQRB and their own extent of other internal and external reviews of the firm.internal reviews. The decision was then taken that to remainrelevant and avoid duplication, an innovative approach wasneeded to augment the work conducted by ASIC, the firmsthemselves and the AQRB (which completed its three yearcharter in 2009).Analysing the findings from ASIC’s public reports, weconcluded that there was an important piece missing fromthe review process. Our view was that while detailedinspections of work were important, a detailed understandingabout the auditors’ attitudes to the key drivers of audit qualitywas missing. Understanding these mindsets was key to thecontinuing development of audit quality.From this premise, we took the initiative to developquantitative research of auditors of the major firms - researchwhich is aimed at assessing the importance of the keydrivers of audit quality in those firms. This paper provideskey messages and analysis of the responses received acrossthe participating firms and also sheds light on our work2. Public Company Accounting Oversight Board website www.pcaob.org3. The benefit of audit: A guide to audit quality, 2009, Institute of Chartered Accountants Australia6 Preserving capital market confidence through audit quality
  • 7. Sustainability of the profession Research finding: play a strong role. When auditors commence their work, they are often seen by the CFO as a necessary disruption to the Quality external auditing is integral to the effective business. The audit committee is in the position to better functioning of our capital markets. It is an essential service communicate with and ensure the full benefit of the audit requiring specialist skills and knowledge. Therefore, the work is carefully understood by the management or client. sustained viability of the audit profession is critical and in particular attracting, retaining and developing the right The demand for skilled professional accountants, auditors and people for the profession. finance managers continues to be a key issue for Australian businesses, and the broader economic picture. Another challenge for the profession is that over the next 40 years,The audit profession provides services that are of immense the number of people in Australia aged over 65 will double5.value in supporting well-informed capital markets and fulfilling Growth in the workforce population is also set to dropthe public interest. The global financial system of today faces during the same period (growth in those of workforce age ismany risks. The audit profession is in a prime position to drive expected to drop from 1.2 per cent per annum over the lastfinancial integrity and skill for the public interest. ten years to zero over the next four decades).The Institute has a responsibility to continually challenge the Attracting the younger emerging generation and skilleddifferent cultures within the profession. The dynamic nature migration remains vital to ensuring Australia has theof business today places demands on the profession that not appropriately skilled accounting and finance professionalsonly expand the roles of the accountant and auditor but also needed to maintain and build sustainable organisations thatrequires flexibility and adaptation by the profession to meet will enhance Australia’s prosperity.market demands.Traditional notions of accountants and auditors, such as the How would you rate the overall appeal of theclassic bean-counter stereotype, still exist and the research audit profession today?results indicate that less than 50 per cent of the participatingauditors consider the audit profession to be appealing. n=421 n=392 n=635 (45) (35) (39)Generations X and Y have grown up, and Generation Z is 100now hitting the job market. The next challenge for employersand for professional bodies is to deal with the needs ofGeneration C – always clicking, always connected and always 80communicating. Younger people are generally looking forgreater work/life flexibility, than previous generations. To 60attract and retain staff, more flexible work options and animproved work/life balance, will need to be offered4. Managers 4 40 Graduates Qualified Cas 5By being digitally connected, young professionals are now 5looking to work in very different ways. It stands to reason % 20 40that they will want different career pathways. In a corporate 31 34world where finance careers are becoming less uniform, theemergence of career paths based on a corporate ‘lattice’ rather 0than a corporate ladder will be the norm. Our latest leadershippaper in the academic series, Emerging Pathways for theNext Generation of Accountants, also sheds light on the future 20 45 47 46professional working in increasingly diverse and connectedteams, including through shared service centres. 40How organisations such as the major accounting firms and 10 16 14the professional bodies steer this generation through their 60careers will be very important. More work is also needed to Not at all Somewhat Very Appealingimprove communication and the understanding of the value appealing appealing appealingof the external auditor. This is where audit committees can Results: Bars represent the % for each response category on scaled questions.4. Emerging Pathways for the Next Generation of Accountants, 2012, Institute ofChartered Accountants Australia Due to rounded numbers being displayed, the round values in bars may, in some cases, total to slightly more or less than 100%.5. Young Professionals Career Motivation Study - An Insight into Chartered Accountantsaged under 40 years, 2012, Institute of Chartered Accountants AustraliaPreserving capital market confidence through audit quality 7
  • 8. Professional scepticism: Art, science or both? show their quality to competitors and also add to the Research finding: confidence of the business and broader community. Professional scepticism is a state of mind. Today public An integral element of that judgement is professional expectation is arguably at its strongest levels that all business scepticism. Auditors are regularly accountable for professionals, directors, advisors, accountants and auditors demonstrating challenging judgements in environments of have that state of mind and are able to demonstrate it. But significant uncertainty, complexities and pressures. That is this is not simple or straight forward. Our analysis of the the business reality of today. research data shows clearly that auditors at all levels within a firm are fully aware of the importance and implications of “Scepticism is a virtue in history as well as in philosophy.” professional scepticism to the quality of their work. It is front  Napoleon Bonaparte and foremost on their mind. Still more can be done by the profession and the firms to nurture and engender professional Our research shows that professional scepticism ranks in judgement and scepticism to sustain the delivery of quality the top three most important skills across all respondent auditing. Being aware of threats is a key step. groups within the participating firms. Auditors understand its importance and that it is key to their success. That is a particularly relevant result because at times when auditors’ Auditor independence, objectivity and professional judgements are challenged, often after a lengthy period scepticism are critical attributes that underpin a quality from completion of the audit work, the first default, and audit, and these attributes can and should be continuously arguably the easiest, obfuscation can be the auditor’s lack of improved. The need for high quality judgement by business professional scepticism. That flawed interpretation is usually professionals has never been more in demand. Those linked with an implication to a lack of independence by the professionals that consistently make the right decisions auditor. To what extent are the following To what extent do you believe your skills and attributes important in your engagement teams demonstrate current role: Professional scepticism? the following skills and attributes: Professional scepticism? n=254 n=421 n=392 n=635 n=254 n=421 n=392 (100) (97) (97) (97) (94) (86) (83) partners 100 7 100 7 Managers Qualified Cas partners graduates Managers 21 Qualified Cas 80 80 21 19 53 58 60 70 60 83 6 6 45 38 35 40 40 Mean% 32 29 Mean 20 5 % 20 5 24 28 27 29 14 12 10 3 4 0 0 2 3 2 6 1 12 12 2 3 1 20 4 20 4 Relatively less 1 2 3 4 5 6 7 Extremely Never 1 2 3 4 5 6 7 Always important important 8 Preserving capital market confidence through audit quality
  • 9. However, the research data shows that both challenges where independence, objectivity and scepticism are visiblyand opportunities exist for the audit profession and firms. valued attributes, reinforced by their internal systems ofInnovative ways of nurturing and enhancing the right skills quality control.and approach needs to be cultivated to ensure the right levelof professional scepticism is constantly exercised. Coaching “The IAASB’s International Standards on Auditing (ISAs)and mentoring are such essential ingredients in developing explicitly recognise the fundamental importance ofand sustaining this skill. It is vital that the intuition held by professional scepticism. Nevertheless, adopting and applyingmany experienced audit practitioners is transferred to those a sceptical mindset is ultimately a personal and professionalstill developing and that it is delivered with a real sense of responsibility to be embraced by every auditor. It is anthe changing demographics of the audit profession. It is also integral part of the auditor’s skill set, is closely interrelatedimportant to recognise that those with greater knowledge and to the fundamental concepts of auditor independence andservice can still improve themselves. professional judgment, and contributes to audit quality. The auditor’s education, training, and experience are thereforeWe also see significant value in further work being undertaken critical. Audit firms themselves have an important role to playaround the human tendencies that could limit the exercise in cultivating a sceptical mindset in auditors, as do regulators,of professional scepticism such as when auditors are often oversight bodies, and those charged with governance.”confronted (sometimes deliberately) with an incompletedefinition of the problem, knowing or sensing that limitation  Professor Arnold Schilder, Chair of the Internationalis vital.  Auditing and Assurance Standards BoardFinally, it is up to each individual on the audit team todischarge his or her professional responsibilities to performa quality audit, and for their firms to cultivate an environmentTo what extent do you believe the following To what extent have you had Is there an emphasis in theskills and attributes were included in the training in your firm with regard to workplace on the following skillsuniversity course undertaken by you: the following skills and attributes: and attributes: ProfessionalProfessional scepticism? Professional scepticism? scepticism? n=635 (43) 100 7 80 n=635 n=392 (86) (93) 60 100 7 100 7 6 Qualified Cas Graduates Graduates 40 6 80 80 45 16 25 20 60 6 60 6 5 22 Mean % 40 40 0 37 30 24 Mean Mean 20 4 % 20 5 % 20 5 25 18 19 40 0 0 8 5 9 3 2 1 1 5 60 3 20 4 20 4 Not at all Very much Not at all Very much Never Always 1 2 3 4 5 6 7 1 2 3 4 5 6 7 1 2 3 4 5 6 7Preserving capital market confidence through audit quality 9
  • 10. Communication: Latin “communis”, meaning to share For managers, qualified Chartered Accountants and Research finding: graduates participating in the research, communication An evolution continues around the audit profession and the rated as the top skill needed in their current roles (partners skill set required by auditors. These changes are linked to a rated this third highest). The research data also highlights complexity and dynamic nature of business today, the way communication as a key area for future training, particularly capital markets operate in a globalised market place and the among graduates, who cited effective communication as general economic environment. Effective communication one of the most important aspects of training that they is fundamental to the audit process and a quality audit. The believed would allow them to perform their roles more research data indicate skills and competencies traditionally effectively. regarded as ‘soft’, such as communication, are really the true drivers of audit quality. Communication is critical to the way in which auditors handle the complexity and dynamic nature of business today. It is the way they share knowledge and evolve Communication is at the very heart of auditing. strategies. Communication within audit teams gives rise to shared wisdom and enhances or encourages professional “The single biggest problem in communication is the illusion scepticism. That communication is also how audit findings that it has taken place.” are best assessed and developed to give the right audit outcomes. An auditor’s communication with a client is core  George Bernard Shaw to the delivery of insights beyond financial reporting, and these go to the way management and directors can better An important evolution in audit thinking is underway. safeguard a business and its assets. Communication has traditionally been seen as a soft skill To what extent do you believe your To what extent do you agree or disagree engagement teams demonstrate with: Effective and open discussions with all the following skills and attributes: members of the audit team regarding matters Communication? significant to the audit take place on a regular basis throughout the engagement? n=254 n=421 n=392 n=254 n=421 n=392 (83) (90) (83) (98) (96) (91) 100 7 100 7 Managers partners partners Managers Qualified Cas Qualified Cas 11 80 80 18 24 46 62 34 60 6 60 6 48 42 36 40 40 42 39 Mean Mean% 20 5 % 20 31 5 34 30 30 11 16 4 0 0 6 7 1 2 3 9 1 1 2 2 1 1 2 2 20 4 20 4 Never 1 2 3 4 5 6 7 Always Strongly 1 2 3 4 5 6 7 Strongly disagree agree 10 Preserving capital market confidence through audit quality
  • 11. peripheral to the hard core of auditing financial statements. The profession has come a long way. The discrepancies between the levels at which the respondent groups believed that there was effective communication during an audit engagement indicates the importance younger staff place on effective communication. It also highlights a source of potential improvement in what is a key driver of audit quality. Sharing of skills and experience is not only important to any single audit. It is also a critical part of the maintenance and development of the profession of auditing. Only part of auditing can be learned by book study; judgement and professional scepticism need to be fostered by shared experiences. One of the greatest threats we see to the effective communication of the profession is the technology advancements of today. Because of the advent of technology in society today, traditional face-to-face communication skills have diminished. And now that you are working in audit The top three skills for each respondent group have been calculated based on the highest ranked average scores for all questions on the most important skills services, to what extent do you believe and attributes in respondents’ current roles. Note: where skills have the same the following skills and attributes are average score the skills are ranked alphabetically. important in performing your role as an auditor: Communication? Average score (out of 7). Top 3 skills - Partners 1. Professional scepticism 6.8 2. Objectivity 6.7 n=635 3. Communication 6.6 (98) Graduates Top 3 skills - Managers 100 7 1. Communication 6.6 2. Professional scepticism 6.6 3. Teamwork and leadership 6.6 80 Top 3 skills - CAs 62 1. Communication 6.4 60 6 2. Task and time management 6.4 3. Professional scepticism 6.3 40 Top 3 skills - Graduates 1. Communication 6.5 2. Task and time management 6.5 Mean % 30 20 5 3. Professional scepticism 6.4 7 0 1 Using an average score (a measure of central tendency) takes into account variation in ratings across the entire distribution of scores from extremely important right through to not at all important, i.e. the average score takes into 20 4 account not only those who think the attribute is important, but also those that think it is unimportant and the degree to which they feel this.Relatively less 1 2 3 4 5 6 7 Extremely important important Preserving capital market confidence through audit quality 11
  • 12. A pillar of corporate governance: the audit committee of directors as the representatives of the shareholders. In Research finding: Australia and the UK, the committee’s role in overseeing Quality external auditing is integral to capital market the external auditor is not bound through legislation, but is confidence. Engagement partners supervise audits that considered best practice. span continents and oceans. Effective audit is enhanced by the mutual respect between auditor and auditee. The Candid and open communication between the external auditor auditor’s communication with the audit committee is and audit committee is imperative and it is equally important moving decisively from a compliance-based dialogue to the that these two parties communicate effectively to strengthen direction of meaningful, effective interchange. the corporate reporting and governance process. The responses in this Audit Quality Research 2012 indicateThe volatility of capital markets combined with the thirst for that the senior members of the audit engagement team placetransparency and corporate accountability demands a response a greater emphasis on the quality of the relationships with thefrom boards, management and external auditors. In practice, audit committee, management and the board, and this may bea three-way relationship exists between the committee, because they have a greater client-facing role than the others inmanagement and the external auditor. Our recent thought the team.leadership paper, Walk the line: Discussions and insights withleading audit committee members, highlights the importance of It is important for the lead audit partner and his or her seniorthe relationships that need to be forged and the communication team members to understand the audit committee, includinglines that need to develop among boards and management the chairman, so both teams can develop a sense of respectwith the external auditor. and confidence for each other’s responsibilities. Such a relationship also establishes an environment in which clear,Overseeing an effective engagement with the external direct and candid communication flourishes. “No surprises”auditor is a key responsibility of the audit committee. The has long been a goal of effective communications and a strongaudit committee recommends the external auditor, assesses relationship between the audit committee and auditor. Anyits independence, discusses the audit scope and determines efforts and measures by the firms to increase transparencythe external auditor’s compensation. In the United States, and effective communication around the audit is a stepthe Sarbanes-Oxley Act says that the external auditor works forward in enhancing audit quality and strengthening corporatefor and is accountable to the audit committee and the board governance. To what extent do you agree or disagree To what extent do you agree or disagree with: with: The quality and timelines of most audit Your clients provide co-operation and support to committee / board / owner interaction on your the engagement team? clients ensures a quality audit? n=254 n=421 n=392 n=254 n=421 n=392 (91) (87) (79) (95) (88) (81) 100 100 7 7 partners Managers partners Managers 80 80 17 9 13 Qualified Cas 24 Qualified Cas 9 12 60 60 6 6 44 52 35 44 36 40 44 40 Mean Mean % 20 5 % 20 5 35 37 30 30 26 22 0 0 7 9 4 8 12 13 1 1 2 3 2 6 1 5 2 1 1 20 20 1 4 1 4 3 3 40 40 Strongly 1 2 3 4 5 6 7 Strongly Strongly 1 2 3 4 5 6 7 Strongly disagree agree disagree agree12 Preserving capital market confidence through audit quality
  • 13. Influencing the profession of recent times, and what the profession can do on its own to Research finding: address the current challenges. Nevertheless, the simple facts The financial audit is the linchpin for upholding confidence are that confidence and stability are critical to the success of in the capital markets. Our research marks the first major capital markets, and auditing helps bring these attributes to our research of auditors within major firms and augments the markets. Instead of risking a crisis, it is important to uphold this rigour of inspections conducted by regulators and the firms’ trust and confidence in the auditing profession. The objective, internal review processes. after all, is to ensure that the needs of companies are met and   that these companies have access to high-quality, reasonably priced auditing services.An excerpt from correspondence sent by a partner at Ernst &Young: Probably a more long-term challenge for the firms and the professional bodies is to deal with the needs of the digitally “We appreciate the effort made by the Institute to provide savvy Generation C – always clicking, always connected and insights into the mindsets of our people to audit quality and always communicating. According to our latest leadership to provide benchmarks against the results from other firms. paper in the academic series, Emerging Pathways for the Next It is refreshing that the Institute uses this innovative research Generation of Accountants, managing the aspirations of the methodology rather than file inspection - which is the approach youngest generation in finance in this fast changing workplace used by our internal quality programme and by the regulators. presents a new kind of higher education student and employee. The research approach provides some different perspectives and also involves some of the junior team members who are ‘Young people are now Internet literate, digitally connected generally not affected by inspections.” and will want to work in very different ways, and hence will want different career pathways. In a corporate world where Denis Thorn CA, Partner – Ernst & Young finance careers are becoming less uniform, the emergence of career paths based on a corporate ‘lattice’ rather than aThe participating firms have provided overwhelming support corporate ladder will be the norm. The future professional willand endorsement for the research in offering in-depth analyses also work in increasingly diverse and connected teams, includingof the underlying elements of the drivers of audit quality within through shared service centres. How organisations such as theaudit practices of the firms. These firms have undertaken to ...professional bodies steer this generation through their careersdraw on their particular results to enhance any aspects that will be very important.’could be improved. We will continue to engage with the firmsto correlate findings from the research with issues arising from Another challenge facing the profession, including the academictheir internal review program and the ASIC inspection. Overall, world, is that ‘the student of tomorrow will have more educationthe research results indicate a high degree of consistency across options available to them and they will be born in a digital ageall respondent groups in relation to a strong commitment to audit where their learning experience involves digital applications andquality. social networks. How, when and where candidates learn will be their choice, and they will naturally see themselves as part of a “I have been trying to point out that in our lives chance may global environment.’ have an astonishing influence and, if I may offer advice to the young laboratory worker, it would be this - never to neglect an This is the reality of today’s candidates and our next generation extraordinary appearance or happening.” of Chartered Accountants. Our earlier research shows 40 per cent of candidates are aged between 21 and 25 years, and 38 Alexander Fleming per cent of candidates are between 26 and 30 years6. This young cohort of professionals is technology and Internet savvy in allWhile the professional bodies, standard setters and regulators areas of their work and personal lives, with their education andeach play a role in guiding the profession, it is up to each learning no exception.individual on the audit team to discharge his or her professionalresponsibilities to perform a quality audit. Audit firms and We are adapting to these changes and starting from 2013, thepractices must also continue to innovate and cultivate an Chartered Accountants Program will be more contemporary inenvironment where independence, objectivity and professional its content and delivery, incorporating modern learning designscepticism are visibly valued attributes. and teaching methods with the latest technologies. This will be a joint Program delivered in conjunction with the New ZealandThe debates continue about the role that the auditing profession Institute of Chartered Accountants, which will further enhanceitself has played in bringing about some of the corporate failures the Chartered Accountants designation on both sides of the6. Young Professionals Career Motivation Study - An Insight into Chartered Accountants aged under 40 years, 2012, Institute of Chartered Accountants AustraliaPreserving capital market confidence through audit quality 13
  • 14. Tasman. The new Program offers more flexibility and caters forthe different learning styles of candidates, yet still maintains thequality and rigour that is at the heart of the Program.Next stepsThe global financial system of today faces many risks and wefeel the audit profession is in a prime position to drive financialintegrity in the interest of society. The Institute, in turn, hasa responsibility to continually challenge the different cultureswithin the profession. This paper has sought to provide thekey findings from the Audit Quality Research 2012 on majoraccounting firms. Our intention is to extend this researchmethodology to other firms within Australia and potentially inother jurisdictions. The message is clear: we will innovate andcontinue to invest time and effort in preserving capital marketconfidence through continually improving the quality of externalauditing.14 Preserving capital market confidence through audit quality
  • 15. Resources:• The benefit of audit: A guide to audit quality, 2009, Institute of Chartered Accountants Australia• Continuous cycle of audit quality: Framework for managing audit quality sustainability, 2010, Institute of CharteredAccountants Australia• Audit Policy: Lessons from the Crisis, 2010, The European Commission Green Paper• Young Professionals Career Motivation Study - An Insight into Chartered Accountants aged under 40 years, 2012, Institute ofChartered Accountants Australia• Walk the line: Discussions and insights with leading audit committee members, 2012, Institute of Chartered AccountantsAustralia, Financial Reporting Council (UK), The Institute of Chartered Accountants of Scotland• Emerging Pathways for the Next Generation of Accountants, 2012, Institute of Chartered Accountants Australia, University ofSouth Australia• Quality Review: past, present and future, Getting the balance right, 2010, Institute of Chartered Accountants Australia• The Center for Audit Quality www.thecaq.org• The Public Company Accounting Oversight Board www.pcaob.orgThe five drivers of audit quality:1. The culture within an audit firm2. The skills and personal qualities of audit partners and staff3. The effectiveness of the audit process4. Factors outside of the control of auditors5. The reliability and usefulness of audit reporting.The benefit of audit: A guide to audit qualityCo-regulatory environment:The following diagram illustrates the co-regulatory environment regulating the work of Chartered Accountants in Australia. IFAC Institute of Chartered FRC Accountants AustraliaObliges member bodies to conduct a Quality reviews consider the Responsibility for monitoringmandatory Quality Review Program. review work conducted by other the effectiveness of auditor bodies, provided there is sufficient independence requirements documentation to rely on. in Australia. The FRC has a memorandum of understanding with Conducts the Institute. quality reviews Chartered ATO Compliance Accountants Conducts ASICConducts compliance reviews of reviews of approved in Practice audit inspections Has responsibility, under theSMSF approved auditors as part of auditors Corporations Act, for the surveillance,its compliance program in relation to investigation and enforcementAustralia’s tax and superannuation of audit independence and auditlaws. standards. Its Audit Inspection Program is currently focused primarily on auditors of listed entities. From 2013 all SMSF auditors must be registered with ASIC. Other regulatory bodies The activities of accounting practices are monitored by a range of regulatory and other bodies depending on the nature of the practice and type of engagement conducted. This includes the Tax Practitioners Board.Preserving capital market confidence through audit quality 15
  • 16. Contact detailsInstitute of Chartered Accountants AustraliaNational office33 Erskine StreetSydney NSW 2000GPO Box 9985, Sydney, NSW 2001Service 1300 137 322Phone +61 2 9290 1344Fax +61 2 9262 1512Email service@charteredaccountants.com.aucharteredaccountants.com.au