January 8, 2016 Auditing clarity
When you’ve been in business for a while you start to see the pattern of the year in a whole new light. So December is marked either by frantic pre-Christmas sales or as a quiet time in which to reflect and plan; whilst for those who network, January is marked by a distinct absence of accountants at the lunch table.
Although businesses are free to choose their own accounting period, many choose to do so on the quarter end and with self-assessment tax returns also due by the end of January this makes for a very busy month for the accountancy profession. It’s little surprise therefore that the FRC has chosen the beginning of January to release the results of its 2015 audit quality thematic review.
The review is based on the findings of inspection teams throughout last year and is designed to aid audit firms to develop, enhance and evolve their policies on audit quality control. However, it should also be essential reading for audit committees together with all those who are interested in strengthening corporate governance through the pursuit of clear accounting practices and reporting.
One of the clear messages which arises from the review is the importance of undertaking a thorough root cause analysis in the event that audit or quality control deficiencies are identified. The review makes the point that remedial action such as enhancing quality controls or the provision of further training may address a particular deficiency in the short term; but unless the underlying cause is understood the deficiency may well reoccur.
The important role which audit committees have to play in reviewing and monitoring the effectiveness of the audit process is also highlighted within the report. Commenting that “their work in this area can make an important contribution in building investor confidence in the quality of the external audit and ultimately in the credibility of the financial statements”, the report also highlights the part which audit committees have to play in assessing the strength of individual audit firms as part of the tender for audit process.
Once seen as pure number crunchers and box tickers, auditors are now playing an increasing role in working alongside businesses in order to strengthen accountability and governance. This means they have to walk a tricky path between independent oversight and development partner but it is a role in which they can bring much to strengthen business accountability. Thematic review such as that carried out by the FRC can only help in this regard, and it is in this light that we would recommend that the review is also studied by all corporate directors as a way to build understanding of the part which auditors can play in corporate development.