The Future of Audit Profession

By Ferran Munoz-Lopez Partner,

July 16, 2019

We are in a time of significant economic, political and technological change.

Expectations of all organizations are shifting rapidly. This is as true for the professional
services sector as it is for the companies we work with. The audit profession is under
great scrutiny and has been subject of much commentary and challenge in the public
arena including hitting the news headlines, not always for positive reasons. This has
triggered multiple reviews of the audit market, which have been focused on auditor
independence, competition and choice, as well as the scope and quality of auditing.

The Financial Reporting Council (FRC) has scrutinized the auditors work, and some
MPs on the House of Commons Business, Energy and Industrial Strategy Committee
called for the Big Four firms that dominate the audit market to be broken up to improve
competition in the sector and increase public trust in the quality of companies’ accounts.

The Competition and Markets Authority (CMA) has, however, ignored the calls from
MPs to push for a complete breakup of the audit firms, instead asking for auditing
departments to be split from their often much larger consultancy businesses, although
they can remain within the same group. Two of the Big Four auditing firms have made
such a commitment, but there could be unforeseen consequences of such a move as
audit practices will now have to stand alone financially so fee increases could be on the
cards given the continued demands on audit quality.
Under the CMA’s proposals, competition would also be encouraged by the introduction
of mandatory joint audits, which would force the Big Four to work with smaller firms
when auditing accounts.

What is clear is that audit has not kept pace with society’s expectations. That’s why
there is an urgent need to explore how the audit profession needs to evolve for the
future. Those of us in the audit profession must acknowledge that our current critics
have raised valid concerns. More stakeholders than ever depend on the accuracy of
financial reporting; shareholders rely on a far wider set of performance information than
is included in the ‘back half’ of the annual report; and there is rising demand for auditors
to give a more forward-looking assessment of an organization’s health, whether in the
public, private or the third sector. None of these areas are adequately addressed by
today’s statutory audit model. Building and maintaining confidence in the audit matters:
it plays a critical role in underpinning confidence and trust in business and the capital
markets. This is important, not only to the sector but also to the many stakeholders who
rely on the assurance that the audit profession is here to provide.
All the stakeholders connected with the audit process should contribute in making sure
the auditor's regulations and standards are understood by the general public as there is
still a gap between what an audit is required to do and the expectation of what an audit
can achieve.

The audit firms are working on increasing the audit quality with the main focus being on
further training and enhancing the use of technology. Technology will enable auditors to
audit 100% of available company information and to provide greater benchmarking and
market analysis. However, technology will be unable to replace the important judgment
element of an audit, which leaves a critical element down to the professional skills and
ability of the more senior members of the audit firms. All of this means that the
traditional model is exhausted and auditors will have to upskill their abilities, making a
more varied, exciting and rewarding career.

You may presume all the above is related to the UK, especially listed entities and our
proximity to it, but Isle of Man auditors of listed entities are publicly inspected to the
same standards and so the profession here will have to evolve. As the standards and
expectations of auditors acting in the public interest arena are raised, the rest of the
profession will need to adapt too. This would definitely help ensure the audit quality in
the Island maintains UK and international standards.

Reference:

https://www.pwc.com/im/en/media-room/articles/future-audit-profession-change-
finance-iom0.html