Angel Sithole | Project Director | Audit and Assurance | South African Institute of Chartered Accountants (SAICA) | mail me |
The last five years have seen an improvement in the audit profession when it comes to audit failures. Is this evidence that the entire financial ecosystem finally understands the importance of taking responsibility for the audit process or is it because of the increase in legislative mandate and high scrutiny that is currently imposed on the audit profession?
Some legacy issues come up now and then on the news, but we are hopeful that the days of audit failures are behind us. How do we continue to ride this new wave, as it were, and retain the momentum?
Ensuring good governance and accountability
Auditors are regarded to be independent gatekeepers for investors and shareholders. This is potentially why there is usually an expectation gap between what auditors’ responsibilities are and what the market thinks are the responsibilities of auditors. How do we narrow this gap and ensure that everyone in the financial ecosystem wins?
A lot of research has been done on human behaviours and the financial ecosystem. Some may say let’s keep telling the good stories of what auditors do, while others say let the entire financial ecosystem be trained on their respective responsibilities to ensure good governance and accountability. The one fact that remains unchanged is that one audit failure results in a negative perception of the entire profession.
Would a centre of audit quality shift the eco-dynamics? Would it assist our profession in ensuring that all members of the financial ecosystem are held accountable? Let’s explore this thought further.
The main purpose of having a centre of audit quality is to enhance public trust and promote high-quality financial reporting by the profession. The role of auditors will continue to be critical when it comes to financial capital markets in protecting investors and the public at large.
Protecting the public from audit failures
Investor confidence and trust in capital markets have a direct or indirect correlation to the state of affairs of any organisation − which in recent years usually means the audit opinion will increase or decrease investor confidence, which in turn will affect the shareholder value.
For example, an audit opinion that consisting of several key audit matters highlighted by auditors from internal controls to liquidity issues would make any investor uncomfortable to invest in a company, and those investors that already have a share in the company could look to dispose of their investments.
Over recent years our profession has noted an increase in regulations intended to mitigate and protect the public from audit failures. This has put a strain on the profession, as we see fewer individuals who want to be registered auditors.
Changing landscapes driven by drivers such as ESG reporting, new technologies, and globalisation demand that auditors continue to upskill themselves to remain relevant in the current environment or face being extinct. The establishment of a centre of audit quality may be the answer to the call or the missing puzzle.
For example, in the United States, the purpose of the US Centre of Audit Quality includes being responsible for driving the following:
- Representing an independent voice of the auditing profession and engaging with regulators and stakeholders on matters affecting the profession and the role of the profession in the economy and society.
- Independent analysis and views on accounting and audit technical matters in general.
- Collaborating with legislators, regulators and other business associations and stakeholders to establish a stable, conducive policy and business environment.
- Promoting initiatives to enhance the attractiveness of the profession.
Does the profession in South Africa need a voice that will speak on its behalf when controversial statements are being made with regard to auditors and to drive the necessary culture in the profession that will enhance investor confidence?
Related FAQs: Audit quality and governance accountability
Q: What is the role of the audit committee in ensuring financial reporting quality?
A: The audit committee plays an important role in overseeing the financial reporting process, ensuring that the financial statements are accurate and comply with relevant regulations. They monitor the work of both internal and external auditors to improve the quality of financial reporting.
Q: How does corporate governance affect audit quality?
A: Corporate governance structures significantly influence audit quality by establishing a framework for accountability and transparency. Effective governance practices enhance the relationship between corporate governance and audit quality, leading to more reliable financial statements.
Q: What are the key responsibilities of an internal auditor in relation to financial governance?
A: Internal auditors are responsible for assessing the effectiveness of governance practices and the internal control environment. They provide insights into improving financial management and reporting quality, which directly impacts the overall audit quality.
Q: Why is transparency important in the context of financial audits?
A: Transparency in financial reporting promotes public accountability and trust. It ensures that stakeholders have access to clear and accurate information, which is crucial for assessing the financial performance and governance practices of an organisation.
Q: How can organisations improve the quality of their audits?
A: Organisations can improve audit quality by investing in staff training, enhancing communication between the audit committee and auditors and regularly reviewing audit practices. This also includes ensuring that auditors are independent and that the effectiveness of the audit committee is evaluated regularly.
Q: What is the impact of external audit quality on financial performance?
A: High external audit quality enhances the reliability of financial statements, which can positively impact financial performance by improving investor confidence and fostering better decision-making among stakeholders.
Q: How does the effectiveness of the audit committee contribute to governance accountability?
A: The effectiveness of the audit committee is crucial for governance accountability as it ensures that financial reports are accurate and adhere to governance structures. This oversight helps mitigate risks associated with financial misreporting and enhances public trust.
Q: What are some common governance practices that can improve financial reporting quality?
A: Common governance practices that can improve financial reporting quality include establishing clear policies for financial management, regular reviews of financial statements by the audit committee and adherence to international accounting standards to ensure consistency and transparency.
Q: What is the relationship between corporate governance and the audit report?
A: The audit report is a critical output of the auditing process that reflects the effectiveness of corporate governance. A well-structured governance framework ensures that the audit report is comprehensive, highlighting the quality of financial reporting and any areas of concern.