A number of the auditing ‘scandals’ that have hit the press in recent months (in particular those concerning Carillion and BHS) have reopened the debate on whether auditors exhibit real professional scepticism.
Although auditing standards require it, it is not particularly well defined and therefore a tough nut to crack. On recent Insight Training courses, we have found that understanding the inhibitors to professional scepticism can go a long way to helping audit firms better demonstrate this elusive characteristic.
- Too much focus on client care?
In the professional services sector, client care is always going to be important because clients are our paymasters and often for far more than just audit. However, this often puts too much focus on getting the right outcome for the client and not enough focus on audit quality.
Think about this in the context of going concern. If the auditor feels that there is a ‘material uncertainty’, auditing standards require an explanatory paragraph in the audit report – but for the client’s bank, customer or supplier such a paragraph might convince them to cancel a contract or not renew an overdraft facility. Here the auditor is on the horns of a dilemma – but a professionally sceptical one will know that they need to do the right thing and follow the auditing standard. Perhaps this reinforces the idea, that a model which allows us to provide non-audit services to audit clients, is fundamentally flawed?
- Budgetary and fee pressure
Professional scepticism requires time for contentious issues to be discussed properly within the audit team and for auditors to raise concerns and ask good quality follow-up questions where a client’s initial response or explanation is weak or unclear. However, when the budget is tight, the focus can often be on completing the audit quickly, signing off and moving on.
So maybe it’s about being realistic about the investment in time really required to do an audit properly. Anyone who thinks that they can do a good quality ISA-compliant audit for less than £5K these days is almost certainly living in cloud cuckoo land!
- Wrong tone at the top
This links to the first point above. At Insight Training, we find that some Firms ‘get’ what true audit quality is all about; others simply see audit as another revenue stream and a box ticking exercise. We find that Firms that push back hardest on truly embracing the spirit of the FRC’s ethical standard are normally in the latter category!
Here’s a good example of what the right tone at the top is all about. I recently ran a half-day audit update seminar for an audit firm in London. At the end of the seminar I discovered that one of the attendees, who contributed most supportively and enthusiastically throughout, was in fact the firm’s managing tax partner. He never gets involved in audit but came along to engage in the discussion, understand the current hot topics and help reinforce the ethos and approach expected of his team. Priceless!
- Wrong learning & development focus
Throughout 15 years of delivering practical audit CPD training, we have found that firms have a huge appetite for technical training on auditing and financial reporting standards – but sadly much less desire for us to cover relevant softer ‘business skills’.
Yet these skills are crucial to professional scepticism, be it:
- the questioning and listening skills required of an audit team, enabling them to ask a crucial follow-up question if the FD’s initial response doesn’t make sense; or
- time management skills, crucial to ensure that there has been sufficient challenge of the evidence presented and to enable adequate time to manage staff, the client – and audit partner input – properly.
These skills are integral to the IAESB’s International Education Standard (IES) 8, now mandatory for all UK audit firms and a major area of focus for ICAEW’s Quality Assurance Department (QAD) on their recent inspection visits. Many smaller firms, we find, have never even heard of it!
The ICAEW publication ‘Scepticism: The Practitioner’s Take’ released in 2018 provides excellent practical insights into the topic of professional scepticism. This can be downloaded from https://www.icaew.com/technical/audit-and-assurance/scepticism-the-practitioners-take.