Christopher Humphrey is Professor of Accounting at the University of Manchester. He is a Fellow of the Academy of Social Sciences with a long standing research interest in the auditing profession and public expectations of audit practice.
There may be vivid political imperatives to implement reform in the audit market but the current scale and seriousness of the investigations of auditing in the UK demands much more than a belief in quick-fix solutions. The historically persistent presence of an audit expectations gap should certainly be enough to caution against this latter type of strategy. Reform requires a level of holistic thinking that goes well beyond a group-styled ranking of the most favoured of various proposed market or regulatory reforms, which, without a strong evidence base, amounts to placing a speculative punt on which reform will work best. It is also essential not to focus on audit in isolation of other elements of corporate governance and responsibilities of corporations and their boards of directors – and, most importantly, not to regard today’s conception of auditing as being definitive and beyond question. In this regard, it is vital to remember that we have been here many times before, with innumerable studies discussing the future of the audit as we know it and raising similar concerns about practice, regulation and market competitiveness. So much so that that it merited some of my students examining not the future of the audit per se, but the history of ‘future of the audit’ investigations – and analysing what auditing never managed to become.
While much of the reform agenda in auditing is premised on the importance of restoring confidence in the auditing profession, conceptually, it is striking how the central focus in inquiries to date has been on markets, competition/choice and regulation, with little discussion of the notion of professionalism and what this means in an auditing context. For instance, will professionalism really be enhanced by greater market competition? Will increased regulation only serve further to undermine trust in a profession? Is the pursuit of a stronger regulator an acknowledgement of the relative weakness of the profession?
Questioning of this type, investigating rather than presuming reform impact, can better direct attention to where faith is being placed in the reform process and help to identify and assess the significance of contradictions in policy proposals. For example, if there is a concern that the big firms have become too commercialised is it then logical to advocate greater levels of market competition? In what particular ways is all the (lost) time spent by numerous audit firms unsuccessfully bidding for mandatorily rotated audits serving to enhance audit quality? If big firms are not trusted any longer to undertake public interest entity audits on their own, should they be trusted to guide smaller, challenger audit firms on how best to undertake such audits jointly with them?
Questions can also be directed at the policy reform responses of the big firms themselves. Is it really that wise after having spent years of telling people of the value of providing non-audit services to audit clients to decide to stop providing such services across the board? Especially, when such firms admit that the action is very much a PR gesture and something that they openly admit will not bolster audit quality. What other committed policy stances of the big firms regarding audit and the core drivers of audit quality will be undermined by such a gesture? What other gestures are in the pipeline or now under more pressure to be made?
Reform efforts need to be focused centrally on ensuring the delivery of socially purposeful audits. With the current levels of critical concern over audit, I would question the strength of a profession that leaves it to regulators to say how good audit quality is within the big firms and how such quality is best enhanced. Independent regulation has proliferated in recent years and supplanted self-regulation, but even under such public oversight regimes I believe this is something where the profession can and should be leading. Right now the profession has a unique opportunity to use its expertise and inside knowledge to make its own recommendations and policy reform proposals. These can be based not only on any systemic failings relating to high profile scandals but also on the lessons learned from the good work that is routinely claimed to be done across different sectors and segments of the auditing profession. They should also draw on detailed assessments of the impact of market competition, regulation and firm culture on the day-to-day workings and associated working environment of auditors in practice.
Going back to the expectations gap, all stakeholders need to contemplate whether the audit function itself (as currently ‘defined’) has to change and consider whether now is the time to break out of the traditional, restrictive, declarations that ‘an audit is an audit’. It is somewhat paradoxical at a time when there is evident questioning of the efficacy of audit not to discuss alternative forms of auditing. However, so often the policy assumption is the need to get the current form of auditing working better; challenging the essential, functional competence of ‘audit’ is far rarer, even though audit and audit quality are social constructions and are not fixed in their make-up and identity.
Conceptually, an audit can be something more than a check on the credibility or reliability of a particular information set. So when alternatives to audit are being considered, it is important to think beyond just a simple extension in the field or scope of ‘assurance’. Audit can be more than just a form of assurance. For instance, what is more valuable – an audit that confirms that your business has made a massive loss but has stated the loss accurately in its accounts or an audit that informs and helps to sustain the business, providing meaningful, long-term employment to staff who would otherwise have been made redundant? Is an auditor not able to do or say more than that the accounts of a ‘pay-day’ money lending company charging interest rates of up to 1460% APR are true and fair? From a societal perspective, can a business model reliant on charging such enormous rates of interest ever really be capable of producing accounts that are true and ‘fair’? In essence, when contemplating audit reform we need to consider what would happen to audit, and the associated required skill sets and competencies of auditors if we allow audit to become more of a primary function and not just a secondary function wholly dependent on the value of the information set being ‘audited’? It is not beyond the realms of possibility in an alternative audit construction that all those endangered ‘non-audit’ services could be regarded in rather more positive and vital ways!
Viewing audit in a broader contextual frame of reference particularly arises at present with respect to s172 responsibilities of directors under the Companies Act 2006, the post-2014 requirements for listed companies to produce viability statements and the calls for the UK to adopt a ‘smart’ version of Sarbanes Oxley (SOX). In all of these areas, it is important to consider what corporate responsibility and governance systems already provide and necessitate. Indeed, there may well be provisions and legislative requirements in these and related fields that if given more attention/enforcement could help to deliver what currently popular audit reforms are seeking to secure. It is also much easier to advocate and support ‘smart’ reforms than it is to ensure that such reforms are equally intelligent in terms of what they subsequently deliver.
In the past, an evident tendency in response to reform proposals has been one of muddling through and perhaps it is the approach that has proved to be the least disruptive and economically justifiable. Maybe such a philosophy will win through again – although there are clear signs, especially with the scale of criticism and the unprecedented number of investigations, that this could be something of a watershed moment. Indeed, it is possible to view the situation in a positive light, whereby a constellation of factors (both critical and facilitative, technological and social) have come together to provide a real opportunity for dynamic repair/change. But this will only happen if the scale of conceptual thinking and the scale of different thinking goes deep and broad enough. It is a challenge that the audit profession must be capable of embracing.
As with calls for reform, demanding a new type of thinking is not that difficult. A call for holistic thinking clearly compares well to an appeal for narrow-minded thinking? Likewise, what is going to be more stimulating – advocating the same (old) thinking of the past or fresh thinking for tomorrow? The critical issue is how to do such thinking and to determine when it is becoming closer to being holistic and discarding its narrowness? Much of the text in this article has been about seeking to stimulate such thinking and to break down some of the barriers that serve to prevent it. As a closing reminder, I believe it is worth contemplating the following five observations or suggestions:
FIRSTLY, reflect on how many times when discussing the future of audit that people respond to recommendations by saying ‘yes that it is potentially interesting and important, but what you suggest is not audit. It is something else’. Think here why that ‘something else’ cannot count as audit and what stopped auditing from becoming or embracing this ‘something else’.
SECONDLY, when the auditing profession talks about working in, and its commitment to, the public interest, how frequently is such talk premised or characterised by starting with what auditors currently do now and explaining why this is in the public interest – rather than starting with the notion of the public interest and contemplating what it is the profession can do (not just with its current skillsets and competencies but with potential new ones) to serve better the public interest? Serving the public interest is not a one-dimensional, one-directional commitment. If the profession, as it has done, makes a commitment to pursuing the UN’s sustainable development goals, then its strategic discussions should not just delineate what impact its existing work is having on, say, levels of social inequality and poverty reduction. Such discussions must start by constructing a deeper understanding of social inequality and poverty and from there identify what it is that the profession could do to have the maximum impact. If this falls outside of historic constructions of (social) ‘audit’, don’t explain why it is beyond the reach of audit, but consider the possibilities of reconstructing audit to embrace such issues.
THIRDLY, whenever people talk about audit and what auditing is or is not and what auditing can or cannot do, try to encourage them to conceptualise audit, especially in terms of its (actual or potential) social functionality without making reference to current statutory provisions or existing national or international auditing standards. Without the ability to fall back on such readily available proofs or reference sources as to what is (or, rather, has been allowed to become) audit, it is a lot more difficult to say what is or is not audit. This is because, without such formal or traditional reference points, people are forced to go back to core conceptual thinking or what colloquially gets classified as ‘first principles’. Instead of saying ‘an audit is an audit’ or ‘an audit is a function carried out in accordance with approved auditing standards’, considerations of social functionality push you to contemplate the social contribution of audit and what an audit in principle gives to society.
FOURTHLY, start to think of the type of society you are living in and what assumptions you make and rely on regarding that society and how appropriate, fixed and immutable are such assumptions? If an audit society does not sound like a great place to live, what does that tell you of the way we have constructed audit and what we think of society and the people within it? Contemplate what a society without audit or without a need for audit would look like? Typically, when asked this question, people focus on the first element of the question – envisaging a mafia-like society, with high levels of corruption and distrust. Few imagine a society that had no need for audit and seldom do they get close to envisaging the possibility, for example, of a closely-knit society with sustained high levels of inter-personal trust that make audit redundant. The need for the form of audit that we have come to accept as standard, in essence, is fundamentally tied up with how we regard and view the human race. Audit is there because people cannot be trusted. For a high-trust society to have any need for audit requires a certain level of societal distrust. This distrust is then managed or accommodated by placing trust in audit. So for audit to have a societal role, we have to learn (a) to distrust and (b) to trust in audit/auditors. This is why the present circumstances regarding a loss of social trust in audit and the auditing profession is so critical – for a function whose fundamental roots depend on being trusted, a loss of trust is a fatal flaw. One could even go as far as suggesting that it is inevitable that audit will not be trusted (or will at best be fragile) because that is how we construct or assume to be the very essence of human nature. And why the history of audit depicts a constant battle of the profession and its regulators trying to convince and assure us that we can trust in audit. Viewed from such a standpoint it becomes ever more puzzling as to why we have stuck with this ruling conception of audit for so long.
FIFTHLY, and building on this latter position, the conceptualisation of audit has to start not with audit per se but with society and the kind of society in which we live and want to live. Not trusting the thing (‘audit’) that is there because we don’t trust our fellow human beings, has to stimulate us to think differently, not just about audit but about society and our understandings and assumptions regarding broader social systems and institutional forces that govern us, even extending to contemplate the respective merits of capitalism, our reliance on experts and notions of expertise, and core beliefs regarding democracy and human rights.
In the early 1980s, when it was becoming popular for firms to publish their own audit manuals, Thornton Baker (now Grant Thornton), put on the front cover of a new edition of its audit manual, the dictionary definition of the verb ‘to think’. Many of those active in ongoing debates over the audit function would acknowledge that reforming audit today has to encompass a rethinking of audit and a reconsideration of the role, status and functioning of the audit profession.
One of the main problems with thinking differently about audit, however, is that any such ‘rethinking’ seldom goes much beyond existing conceptions of audit and is focused more on how to ensure that (what we currently know and regard as) audit either works better or is applied to new areas of corporate and social activity. Core auditing conceptual pillars of independence, reporting, evidence collection and liability closely resemble rationalisations of existing and past practice, but are all tainted by the realisation that such conceptualisations have stood alongside a historically persistent expectations gap, with innumerable discussions of audit not being the audit that people want but the audit that people are statutorily required to deliver. It is high time that such social dysfunctionality was brought to an end, especially when texts on the philosophy of auditing have long highlighted that the essential distinguishing characteristics of a profession is its capacity to serve the public – to provide public service (see Mautz and Sharaf, 1961, p. 239 citing Carey, 1956). What is needed is a deeper form of conceptual framing that allows audit to break free from the constraints and limitations of its conceptual past.
If this seems like too high a level of thinking, just think how infrequently (both now and in the past)) thoughts on the future of audit extend from macro-level posturizing to a detailed, micro-level understanding of what it is like on the front-line when delivering today’s audits and the ways in which young professionals, our auditors of tomorrow, are currently being educated and trained? The short answer is not very often. Just ask yourself if accounting firms should be doing something different than referring in their transparency reports to staff who are neither partners nor support staff as ‘fee earners’? We must question if such a commercialised frame of reference coupled with the provision of more rules and regulations, more detailed practice standards, more service bans and restrictions, more independent inspection visits and quality control reviews, greater sanctioning powers, stronger regulators and the threats of higher fines really will provide the environment most conducive to professional learning, development and, ultimately, socially valuable audits? Personally, I think we can do (and are) better than this!
So, in closing, what would happen if the above reflections were not classified as ‘critical thinking’ but were treated as the very essence of audit? Freed from the constraints of ruling legislation and existing auditing standards, could we view audit as a form of social conscience, a reflective, alternative voice on what we take as given or automatic? A voice that listens and communicates in ways that transform and enables people to do better things?
In this regard thinking differently may well be something that lies directly at the core conceptual heart of audit.
Thinking differently is not what we need to do about audit; arguably it is the very essence of audit!
It is what we need to do to become a better society. Ultimately, this is what the auditing profession has to embrace in going back to first principles. This is public service.
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