An opportunity to redeem

Thanks to increasing pressure from regulators, the auditing industry is undergoing a change of attitude.

From merely expressing a reasonable assurance on the statutory financial statement, auditors are now driving efficiency into traditional audit processes. That's a shift from a report centric system to a stakeholder value-centric approach.

This change owes much to changes introduced in the the new Companies Act, 2013. This has necessitated the audit profession to introspect and take steps to protect its interests.

For instance, the Act has bought in the concept of mandatory rotation of auditors. The scope and extent of auditor’s liability has been substantially enhanced.

The auditor is now subject to new forms of liabilities, and the liabilities prescribed in the 1956 Act have become more stringent as well.

Now the auditor comes under the supervision of multiple regulators, apart from her own professional body — Institute of Chartered Accountants of India (ICAI).

The Act proposes to set up a National Financial Reporting Authority (NFRA), replacing the existing advisory committee for accounting standards — NACAS.

NFRA will investigate matters involving professional or other misconduct of auditors.

Apart from such regulatory oversights, the 2013 Act proposes the concept of ‘class action suits’, where a class of shareholders can claim damages or compensation or demand any other suitable action against the auditor including the audit firm, through filing an application with the National Company Law Tribunal.

Globally, regulators such as Public Company Accounting Oversight Board (PCAOB) in the US and International Auditing and Assurance Standards Board (IAASB) have issued exposure drafts with some challenging suggestions on audit reporting. These include providing insight into critical matters that the audit focussed on.

Auditors would now need to consider how these changes can be achieved. Energies need to shift to begin working on what will be needed to deliver the new style reports.

The new audit reports envisaged by IAASB, PCAOB, the UK FRC and the European Commission all expand it to provide greater insight into the audit. The are move away from a standard worded report to one that is tailored and specific to the particular audit and entity.

Each of the standard setters has described the ‘filter’ to select critical audit matters to be reported differently. For one, the UK model is driven by the audit planning and scoping decisions; the IAASB and PCAOB filters are arguably based more on the outcome of the audit process.

The Indian proposals are evolving, with increasing alignment towards IAASB’s requirements and there is going to be a paradigm shift in the auditors’ reporting obligations.

The regulatory proposals are expected to focus on matters such as including an explicit statement on auditors independence, conclusion by the auditor on the appropriateness of the use of going assumption by the management, explicit statement on the auditor’s responsibility regarding ‘other information’ , disclosure of auditor tenure with the organisation, and so on.

Apart from the change in legislation, factors such as increased use of IT have also led to change in expectation from the audit profession.

Dependence on IT and regulators’ mandate to undertake assurance engagement in digital format have made it imperative for auditors to equip themselves with the latest computer-based audit methods and ensure that the audit documentation is robust enough to demonstrate the nature of the work undertaken and the procedures performed to arrive at the conclusion.

With such challenges, it will be important for auditors to focus on how the desired changes can be practically achieved.

This requires entering into dialogues with those charged with governance (board, audit committee, etc.) and testing the proposals in practice — the auditor needs to make an assessment of “exposure to unintended consequences” and engage with the regulators to remove the anomaly.

The objective that remains with the profession is to improve its ability to anticipate, identify and respond to market needs, while identifying the threats and the manner in which these can be converted into opportunities.

In order to achieve the desired objective, auditors need to resort to ‘on-the-field testing strategies” and identify whether they can work with the proposed standards to make the judgments that will be needed to discharge their obligations towards stakeholders.

This sort of ‘live’ field-testing is really important at this point. Regulators need robust evidence of the practical implications of what they are proposing. The insights gained will help ensure that regulations imposed are having a workable framework and achieve the aim of ‘distinctive audit’.

Distinctive audit can be achieved with quality built in, efficient delivery and market acceptance.

The components that need to be focused to deliver distinctive audit would include compliance with legal and reporting framework, internal firm quality monitoring policies, audit approach and effective use of audit tools and technology.

And that will be a welcome change indeed.

With inputs from Ridhima Dubey