Are you a GP or Specialist in Audit?

In one of ACCA thought leadership programs to influence voice on issues affecting the profession and the environment in which it functions globally; a roundtable discussion on “Value of audit” was organized by ACCA Singapore on November 2, 2009.

The discussion was facilitated by a very impressive panel of leading professionals, including the Presidents, audit partners, professor, regulator, CFO and internal auditor, to share their expert opinion and experience on the subject.

In the discussion, it focused on the value of audit and its benefits to the various stakeholders; expectation gap related to audit; the engagement of non audit works, conflict of interest; capping of liability of the auditors; audit threshold applicable to organizations; communication by the auditor to the public; function of audit committee and independent director.

It began with the ‘true and fair’ vs ‘correct and fair’ discussion led by President of SIAS. A very interesting thought was evolved to ‘decouple’ the appointment of auditor to a central body instead of confining it at the entity level.

Responsibility and accountability

It is reasonable to expect the auditor to perform a financial audit and express an opinion; it would be an unreasonable stretch by the various stakeholders to expect the auditor to express a ‘true and fair’ opinion on the business that the management has a better knowledge over the auditor. Fair value accounting is one such example.

The responsibility of a ‘true and fair’ representation lies with the management and the board assume this responsibility. The management under the leadership of CEO, CFO or Finance director, the presence of audit committee, is fully accountable on the financial performance, affairs and its representation.

In today complex business environment, it is unreasonable and impractical to expect an auditor having the competency and experience to express an opinion on the business, in particular on subjective matter involving judgmental call where the operating environment is volatile, complicated and may involve the dealing of sophisticated products and valuation. While there is no denial that the big firms have its in house expert that it can draw upon to improve the quality of the audit; inevitably there is a cost associated to such expert opinion.

Financial audit and business

It is very comforting to know the high trust and reliance one place on the auditor, and the high regard to the profession of an auditor. It is also very encouraging to see the quality enhancement in audit beyond compliance and the benefit it can provide to the client like lowering the interest on the borrowing.

While the enhancement raises the quality of audit, it has also raised the expectation one demand from auditor beyond the financial audit.

The management representation an auditor relies confine its opinion to a ‘Yes’ or ‘No’ response that may do injustice to the many quality works performed by the auditor leading to that conclusion to express an opinion on the auditor report.

At the discussion, it gathered that auditor can communicate better to the various stakeholders, in balance to its concern and burden over liability. The better communication could lead to enhance the broader reliance on the audit and may consequently improve the remuneration of auditor, that fall behind other professions and does not commensurate with the quality works it produces.

GP Vs Specialist

It is common that field audit works are performed under the supervision of a senior, or a ‘houseman’ that I referred to using the analogue to a medical profession. The ‘houseman’ is conducting his work with the supervision of the next senior, a ‘GP’. While it is reasonable to expect a GP to know every part of a body (the business), a GP cannot and will not deal with complex cases and must have the knowledge to refer to the right specialist within or outside the hospital (the firm).

The question we need to ask ourselves then is whether is it sufficient to have a general health check (audit) by a GP, or we need to expand the scope of audit to cover a broader aspect of the business that requires a specialist or expert. In which case, it will lead to escalation in the audit fee and also to limit the audit engagement to large firm or firm having the specific domain knowledge as its client.

At the practical front, it is an irony to expect a ‘houseman’ or “GP’ to assess the ‘specialist’ (CEO and CFO) of the client who has the intimate and domain knowledge of the business. Due to the high turnover of the audit staffs, often this adds to the aggravation of the client during the course of the audit.

Career progression and talent retention

In the career progression of an auditor, one will begin his first audit assignment in the field and leads to the career goal of becoming an audit partner or establishing his own firm. In such development, the progression from a ‘GP’ to a ‘specialist’ in audit is no doubt; and the progression to a ‘specialist’ with the specific industry domain knowledge is limited to a few.

The one directional trend of auditor progression confines its growth within the audit industry; and in exception cases you would find one switch from other industry to audit as a mid career change. It is the mid career switch to audit that can enhance the pool of ‘specialist’ having the industry knowledge to audit client within that specific industry. I am encouraged to know that the regulatory body is addressing this knowledge gap.

The value of audit is first associated with the cost and the benefit it provides to the various stakeholders. The diversity in business, product innovation, cross border training, ever changing operating environment, varying associated risks, real time reporting and forward looking statement compounded the expectation gap and scope of audit.

Following this discussion, I like to seek your participation in a survey on this subject and I will share with you the survey result upon its conclusion.

Click on the following link to complete the survey. http://www.surveymonkey.com/s.aspx?sm=xwPjqP22DyR2OkkDhl69_2fA_3d_3d

Thank you