Audit changes need evidence
Tougher Australian auditing standards are on the cards, but are they evidence based?
The potential for companies to collapse due to the COVID-19 economic situation has heightened the focus on financial reporting. Tougher Australian auditing standards are on the cards, with a federal parliamentary inquiry into audit quality due to deliver its final recommendations in December.
However, any changes to audit market regulation need to be evidence based, to prevent unintended consequences, says UTS Distinguished Professor of Accounting Stephen Taylor, who this week delivered the prestigious 81st CPA Australia Annual Research Lecture, the University of Melbourne’s oldest public lecture.
“The key point I want to flag is the danger of overweighting anecdotes and recent experiences. It's important to see the evidentiary basis for developing new regulations and evaluating past ones,” said Professor Taylor, who is also a member of the Australian Accounting Standards Board.
“Regulators and legislators need to work with the research community. They have to be as transparent as they can possibly be, to help facilitate public and competitive analysis of data, and be prepared to debate the implications and findings,” he said.
It's important to see the evidentiary basis for developing new regulations and evaluating past ones.
UTS Accounting Distinguished Professor Stephen Taylor
Financial auditors provide an independent examination of an organisations’ financial records, to determine if accounts are accurate and in accordance with accounting standards, regulations and laws.
They play a critical role in ensuring investors can be confident and informed when making investment decisions, as well as providing trust and support for stockmarkets and the economy. Most auditing services are conducted by the ‘Big Four’ firms – Deloitte, EY, KPMG and PwC.
Recent concerns about audit quality have come from findings by the Australian Securities and Investments Commission (ASIC), which has flagged deterioration in audit quality; as well as from media reports about potential conflicts of interest by firms conducting audit reporting.
“In terms of issues about audit quality, and the regulation of auditing, I think for the most part we have not seen evidence of a strong collaborative relationship between regulators and researchers,” said Professor Taylor.
“The United States has been much better at this… the economic analysis division at the SEC, as well as the Public Company Accounting Oversight Board, is very focused on bringing economic theory and rigorous empirical evidence into play in debating and deciding optimal regulatory intervention.
“There are four basic steps; identify whether a problem really exists, carefully investigate the cause of the problem, then based on evidence of the cause, identify an appropriate treatment, and then continue subjecting that treatment to rigorous ongoing evaluation,” he said.
Professor Taylor said the parliamentary inquiry had taken a sensible, informed approach to gathering as much evidence as they could to make recommendations around disclosure and the delivery of audit and other services, and some of the testimony had painted some colourful stories.
“But colourful stories, as I've tried to allude to in my lecture, aren't necessarily good evidence of a problem, let alone what causes the problem. I don’t think the parliamentary inquiry has really identified any substantial causes for concern.”
The inquiry has provided 10 interim recommendations that are likely to inform the final report. These include clearer rules around the non-audit work auditors can provide, requiring companies to disclose audit firm tenure, and publishing results in a standard digital format.
A recording of the CPA Australia Research Lecture will be available on the CPA website shortly.