The Business Times Singapore
April 14, 2014
Several years since the global financial crisis, audits of the world's largest companies and financial institutions, conducted by the world's largest audit firms, are still plagued by copious failings, according to an international body of audit regulators.
And it's about time more is done—by both auditors and audit regulators—to improve the quality of audits out there.
The International Forum of Independent Audit Regulators (IFIAR)—made up of 50 independent audit regulators from around the world—released its 2013 Inspection Findings Survey last Thursday in Washington.
The report showed persistent deficiencies in critical audit areas, raising concern among regulators around the world.
"The high rate and severity of inspection deficiencies in critical aspects of the audit, and at some of the world's largest and systemically important financial institutions, is a wake-up call to firms and regulators alike: more must be done to improve the reliability of audit work performed globally on behalf of investors," said Lewis H. Ferguson, IFIAR chair and board member of the U.S. Public Company Accounting Oversight Board (which oversees the audits of U.S. public companies).
The report was released at IFIAR's 14th plenary meeting, attended by delegates from over 40 independent audit regulators, including Singapore's Accounting and Corporate Regulatory Authority (Acra).
IFIAR's report is a compilation of audit inspection reports, submitted by 30 IFIAR members, that were issued during the members' most recent annual reporting periods that ended by July 2013. It summarizes key inspection results from audits of public companies, including systemically important financial institutions.
IFIAR's report showed that—for inspected audits of listed public interest entities, or public companies—the main areas of deficiency were in auditing fair value measurements, internal control testing, and procedures to assess the adequacy of financial statement presentation and disclosures.
For the audits of systemically important financial institutions, including global systemically important banks, the key deficiencies were in auditing of allowance for loan losses and loan impairments, internal control testing, and auditing of the valuation of investments and securities. These inspection findings are deficiencies in audit procedures that indicate that the audit firm did not obtain sufficient appropriate audit evidence to support its opinion.
IFIAR's report also found that the audit firms' own quality control systems had the highest number of inspection findings in the areas of engagement performance, human resources, and independence and ethics requirements.
The audit firms covered were the six largest international audit firm networks, or the Big Four—Deloitte, EY, KPMG and PwC—as well as BDO and Grant Thornton.
"The survey makes clear that these important inspection findings are prevalent across many nations and firms," Ferguson noted. He added that IFIAR has taken steps to improve global audit quality, including meeting global network audit firm leaders to discuss inspection results and actions the firms will take to show demonstrable improvement in audit performance. It has also used the survey results in members' home countries to inform their respective inspection and standard-setting activities.
Of the global audit firm leaders, Janine van Diggelen, IFIAR vice chair, and head of the Audit & Reporting Quality Division at the Netherlands Authority for the Financial Markets, said: "The firms should develop robust root cause analysis to gain a clearer understanding of the factors that underlie inspection findings and to take appropriate remedial actions.
"Only with a thorough understanding of the underlying factors that have led to findings can audit firms take appropriate measures. These measures should be aimed at improving their auditing techniques, as well as their oversight policies and procedures, but also consider the cultural and behavioral influences in the firms that were relevant to the deficiencies. Both audit firms and regulators must do more to improve audit quality."
It was also announced at the Washington meeting that Singapore's Acra has joined IFIAR's Investor and Other Stakeholders Working Group (IWG) that engages investors and other stakeholders with an interest in improving audit quality.
Acra's chief executive, Kenneth Yap, said of the regulator's inclusion: "It is vital that we ensure audit and audit regulation continue to provide value to investors. We look forward to encouraging greater participation from investors, audit committees and other stakeholders in the drive to improve audit quality."
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