The Future of Audit

[chandra]

Dear Professional Colleagues,
The Future of Audit is influenced by many factors including the rapid changes taking place in the environment, Technological advancement, growing expectation of audits and high profile audit failure. Among other thing, high profile audit failure are more serious one.

After high profile audit failure relating to audit of Carillion & BHS in UK, the government commissioned two different independent reviews;
(1) Regulation of audit profession (Kingman) and
(2) The Effectiveness of Audit (Brydan).

The fundamental questions surrounding these reviews were question of Competition, Resilience, Conflict of interest, Regulatory weaknesses and Nature of audit itself.

Kingman Review on Regulation suggested restructuring FRC from changing to Audit, Reporting and Governance Authority (ARGA) and give more powers to ARGA, make arrangement for stronger audit quality reviews, greater responsibility for non-financial directors for financial reports, a cooling off period for non-audit services after and audit engagement.

Similarly, Effectiveness of Audit (Brydan Review) highlighted the issues of improper dividend payments resulting from unrealised profits and suggested tightened the dividend regime, suggested for several measures to improve engagement with stakeholders, considering the fraud detection a priority of audit and adopting forward looking options as scope of audit. It further suggested for cultural changes and structural split between audit and non-audit at least operational split between audit and non-audit engagement, increasing regulatory oversight of audit committees, segmenting market cap and use of joint audits for competition and resilience.

Considering the issues discussed above, every country should seriously think of making audit services more credible and value adding one to the society at large.

Thank you and expect your feedback and comments.
Regards,
Chandra Kanta Bhandari, FCA, CPFA

[John Short]

Chandra,

Has there been such failure in public sector auditing: are the regulations governing SAIs sufficient to avoid these scenarios experienced in the private sector?  The auditing of SOEs may more vulnerable given that SAIs often do not audit them.  In Georgia, all private sector auditors must be vetted and approved by the SAI in order to audit in the  public sector with appropriate training provided.  Do you think such an approach might be one way of avoiding the scenarios you have highlighted happening in the public sector?
John

[chandra]

Thank you, John.

Public sector audit failures are not easily identifiable unlike in private sectors. One of several reasons is because of perpetual nature of public sector institutions where financial soundness may not only be the decisive factor for their existence. Contrary to it, private sector ceases to exist (going concern issue) when hit badly in their financial viability as they usually have limited liability.

However, of course there are public sector failures but they appear in different forms and substance; e.g. several issues related to PFM, wide spread corruption, poor public service delivery which results in low trust/credibility of Supreme Audit Institution and in some other cases head of SAI may be impeached.
Financial and organizational autonomy provided to the SAIs in constitutions or equivalent laws, legal or other measures adopted by SAIs for their own transparency and accountability, parliamentary monitoring; power to instruct executives to strengthen SAIs and power to impeach head of SAIs and collaboration and broader collaboration with citizen groups and other accountability institutions by the SAIs are some of the examples of measures which help to prevent/ or avoid audit failures in public sectors. 

Georgian practice is one of the good practices to strengthen private sector audit profession. It basically depends on how accounting profession is regulated in the country. Of course there is no doubt that presence of strong regulator of the profession would be instrumental to avoid audit failures in private sector. In this endeavor, SAIs may collaborate with those regulators for good cause.

Thank you once again John.
Best Regards,
Chandra