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A modern view of audit

John Griffith-Jones co-chairman of KPMG Europe outlined his modern view of audit at the recent ICAS Aileen Beattie memorial Lecturer

John Griffith-Jones co-chairman of KPMG Europe outlined his modern view of audit at the recent ICAS Aileen Beattie memorial Lecturer. We pick out the salient points

We live in complex time. The synchronisation of standards and the march of technology are just two reasons why life has become more complex for our profession. But complex times often call for a redefinition of priorities and a simple restatement of purpose. In my view it time we did just that for audit.
Audit is the staple produce of our profession. But more than that it is what our reputation for integrity, efficiency and competence rests most solidly on.
We must accept that a financial audit is a means to an end and not an end in itself. The end is a set of accurate and year-on-year consistent accounts prepared in accordance with a defined accounting convention – now IFRS. If the market or society at large can be satisfied that it can get the end without the means, the need for an audit evaporates.
If society believes that the means is not helping to achieve the end, the value of the audit evaporates. Either way we are in trouble!
The basic theory behind the audit is that an independent, robust and skilled professional testing and review of the company's activities and accounts, carried out with a dose of healthy scepticism will: spur the company to be honest and reduce the chances of fraud or accidental errors.
Simple really. And with audit methodology defined in audit standards and accounting treatment defined in IFRS we should be in a pretty place.
So what is missing? Clarity on three points:
1)The process we have at the moment reduces not eliminates errors.
2)With existing technology perfection cannot be reached simply by the introduction of more rules or more work.
3)There is a subjective judgement based element to the process, whose effectiveness is highly dependent on the quality of the people doing it. A 'good' audit is not a commodity.
This lack of clarity gives rise to an expectation gap between the profession and the rest of the world which we need to close.
Much of the attempt to control or close the Expectation Gap has been reflected, almost by way of a 'proxy battle' in the ever-lengthening wording of the audit report.
I think we need a new approach. If you buy a toy for your child, you look for a kitemark to 'gain assurance;' that it is 'safe' for them to use. You do not expect to have to read a page of small print describing all the remoter possibilities of danger that the kitemark does not cover.
In my experience for most professional users of accounts such as analysts and fund managers an audit report of whatever length is essentially a 'kitemark' that says to them – these accounts are about right.
Corporate scandals of recent years have taught us we miss the point in spending a lot of time debating what 'about right' means. Because in most cases of major audit failure 'about right' does not come into it. The accounts turn out, with hindsight to be 'spectacularly wrong'. No amounts of words in the audit's opinion will change that fact. The means has failed to produce the end.
I fear the real raison d'etre for those lengthy opinions is to offer the auditor some legal protection. It's not really been about providing society with a reliable kite mark. It's as much about protecting people like me and my firm from being put out of business by a successful claim for negligence.
I think the profession needs to try harder to move to a minimum kite mark standard. We need to be able to say "these accounts are about right unless management have deliberately conspired to falsify them". I am sure more eloquent words can be used – but not at the expense of clarity.
Society would have to accept the standard of 'about right' as value for money and that like it or not here is not as of now, sufficiently reliable audit technology to make it possible to remove the fraud caveat.
Individual auditors and firms, for their part, would need to sign up to an increased level of responsibility for all material error elimination, absent fraud.
It takes courage to look beyond the immediate economic realties – however good or bad – and to plot a course to a longer-term, sustainable growth and development of the audit profession. We must show that courage now.

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