Audit and the financial crisis

It is right that the accountancy profession comes under scrutiny for the role that they may have played in the financial crisis, and that account preparers, standard-setters and auditors should all learn from the events of the last year. The accountancy profession has to consider what it can improve to ensure the current circumstances are not repeated in the future. It is no use the global profession signing a clean bill of health for itself at this time without acknowledging that there is also scope to consider what it can improve.

ACCA believes that, as famously stated in Re Kingston Cotton Mills case in 1896, by L.J. Lopes of the Appeal Court : the auditor is:

‘…a watchdog but not a bloodhound'.

However, there is scope for the profession to look at wider areas of assurance. A review of the business model and risk profile of the organisation would be one area to consider.

Above all, the profession has to acknowledge the expectations gap which exists and consider ways of improving education among those who rely on the audit as to what it can or cannot achieve.

Audit instils discipline, financial rigour, better corporate governance and can deter fraud. It is part of the operating fabric of the economy, and the success of capital markets is dependent on there being a competitive and stable audit market. However, there is much evidence showing that the public around the world and other users of financial statements do not understand what the role of audit is. Indeed, many believe that the role of an auditor is to detect fraud and error in financial statements.

How to resolve this issue has been the subject of much debate. Possible ways forward include:

• broadening the role and responsibility of auditors in the areas of fraud detection
• further strengthening the independence of auditors
• improving financial disclosure
• providing wider education to the public and users of financial statements on the limitations of an audit

The financial industry and all involved in it need to learn the hard lessons from the past year and be bold enough to make the changes needed to climb out of the financial crisis – and make sure the mistakes made are not repeated.

Comments

[Vijay Lutchmun]

Are auditors to be blamed? Do they not follow up audit procedures laid down by the auditing standards? What is lacking in the procedures they follow that they are prone to litigation? Do auditors try to understand the intention of the directors/managers running the business on behalf of the shareholders as a body? Do they concentrate on risky areas of their audit?

I believe these are the questions that auditors should ask themselves to ensure people do not lose confidence in the auditing profession.

[www.facebook.com/profile.php?id=100000204074515]

I really appreciate this approach.

I believe many are unfamiliar with these more appropriate and purpose filling role of auditors. People usually link audit with the detection of fraud in financial statements.

As an audit trainee, I think it is a better approach to define the responsibilities of auditors.

[Jawad Ali]

True that the scope of the audit needs to be enhanced and it would be more beneficial if forensic auditing is carried out not just at the request of the companies, but it should be made essential after keeping in view the stakeholders' requirements and risks involved.

Furthermore, I feel auditors should not only be required to carry out financial statement audits but their role in business analysis should also be considered.

[Muhammad Assad]

It would be a good idea to increase the role and responsibility of auditor in the areas of fraud detection because I believe that no matter what, people will continue to perceive audit as a fraud detection exercise.

[Safiullah]

Good post.. and you are right the scope and importance of auditing as to increase considerably.
What I suggest is that more than the scope the authority given to an auditor should be enhanced. That's when the importance of auditing raises automatically.

[Inna]

Yes.. it is a big problem nowdays... so, who can say what should people expect from the next year? will it be worse????