April 17, 2018 Who watches the watchers?
Who watches the watchers? Or to put it another way, in any organisation where does the buck really stop? Do we look to individuals or department heads, or perhaps we look further up the chain to individual directors or to the board. Some, reading this article, may even decide that external auditors should bear the burden.
Now it’s true that audit firms have come in for their fair share of criticism following high profile collapses in recent years but does their role really make them ultimately responsible for what goes on within a company. After all, the duty of an auditor is to obtain reasonable assurance as to whether financial statements are free from material misstatement. And even the Financial Reporting Council (FRC) acknowledges that “Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with International Standards on Auditing (UK) (ISAs (UK)) will always detect a material misstatement when it exists.”
So whilst auditors effectively hold a watching brief on behalf of lenders and investors, the ultimate responsibility for accounts should more properly rest with the organisation and its own firm of internal or external accountants. Nevertheless, given the recent publicity about the apparent failure of the audit process in certain cases, the FRC have taken steps to enhance their own monitoring of audit firms. Focusing on the ‘big six’ audit firms, the FRC’s new approach highlights five key areas which it considers to be crucial to the ability of an audit firm to carry out effective audits:
- Leadership and governance;
- Values and behaviours;
- Business models and financial soundness;
- Risk management and control;
- Evidence on audit quality, including from the FRC’s annual programme of audit quality reviews.
As part of the review the FRC also intends to discuss with firms how well “candidates for key leadership and governance roles such as Independent Non-Executives, Heads of Audit and Ethics Partners meet our expectations in terms of experience, skills and attributes.”
Those familiar with the requirements for an effective boardroom will see distinct similarities between the first four at least and the duties of directors. And perhaps the similarity is not surprising when you consider that in order to carry out effective audits, an audit company has itself to be subject to strong leadership and governance. Who watches the watchers? From now on the FRC will be watching just that little bit more closely.