Friday, 19 October 2012

Enhancing Audit Quality

ACCOUNTANTS TODAY | SEPTEMBER / OCTOBER 2012

"Findings from the Audit Oversight Board indicate that further effort is required to enhance the quality of auditing,” remarked Nik Mohd. Hasyudeen Yusoff, Executive Chairman of the AOB during the recent National Accounting Educators Symposium (NAES).

“But how do you define quality? Understanding of quality differs between one client and another, and between firms,” he continued.

Championing audit quality is a key task for the AOB. According to Nik, one reason the AOB exists is because every time anyone picks up the financial report of any corporate entity, they should feel confident about the quality of the auditor’s report. As part of initiatives to heighten audit quality, jurisdictions worldwide are taking action to tighten audit regulations; likewise, Malaysian law requires the AOB to ensure auditors comply with standards in arriving at their audit opinions. Meanwhile, the onus is also on the auditing profession to improve quality. “The auditing profession owns the auditing space, and should make it their mission to protect stakeholders who are dependent on the information contained in auditors’ reports,” said Nik.

To help achieve its vision of enhancing audit quality, the AOB has been granted extensive powers. It has tools at its disposal to remedy breaches of professional practice, and can even impose fines of up to RM500,000 on errant firms.

The AOB collaborates regularly with other regulator y regulating bodies locally and abroad, such as Thailand and Singapore. “When you talk about audit regulations, it goes beyond the domestic environment,” said Nik. “Auditing is regional and affects many other aspects of business as well. Professionals are always accountable; more so in the field of auditing. If the accountant prepares a good financial statement but the auditor doesn’t do a good auditing job, the financial statement may not be credible.”

When inspecting a firm, the AOB takes many factors into consideration. One key factor is the tone from the top. Audit firms must constantly juggle between business profitability and audit quality. Profitability shouldn’t undermine quality. Enforcement of quality measures is another aspect – for example, what action has the firm under audit taken against an under performing partner?

The increase in cross-border business is also giving rise to more complex issues, such as compliance with multi-jurisdictional regulations. A firm should also understand its own capacity and limitations when pursuing cross-border business so quality is not impaired. “In most cases, the firm’s resources are stretched, and audit partners may already be servicing several clients – unlike in the EU and US.”

Nik acknowledged that Malaysian audit firms faced many challenges, among them the high staff attrition rate and the overall increase in complexity of the business environment. Nik urged audit firms, especially those training young professionals to enter the accounting industry, to “Apply professional skepticism liberally! Business today is more complex than it has ever been. We face high-level issues which are hard to appreciate or analyse, but we need to fully understand how to approach them. If you look at the complexities faced by auditors today, you will find a major shift from the way things used to be done before. Even so, most audit failures still indicate a failure in the basics of auditing. So you have to keep an eye on quality, not quantity.”

To ensure quality audits in this complex landscape, what is required today is auditing talent that is thinking and engaged. It was worrying to note, he said, that many firms claim they cannot do a good job because of the lack of appropriate talent despite the millions spent on education every year by the government! “Students need to be nurtured with knowledge and skills to understand key principles underlying accounting and auditing standards so that they can apply them in various circumstances,” said Nik. “But students and firms also need to be aware of the necessity to develop the ability to think and identify problems.”

To remedy quality concerns, the AOB is coming up with the Remediation Framework, which encompasses nine points under serious consideration. These are: Firm Structure, Policy and Procedures; Audit Methodology; Training; Human Resources; Effectiveness of EQCR role; Communication; Monitoring Quality; Engagement Review Deficiencies; and Performance Measures for Remediation.

So far firms are responding positively to the findings of the AOB and have provided the AOB with their plans to enhance audit quality. Some are seeing this as opportunities to manage their business risks and it is totally sensible for them to follow through with their remediation plans seriously.
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