Auditors must be more transparent

Auditors have been under little pressure to provide information about what they do, but this is about to change, argues Peter Williams

For a time, auditors attempted to audit without using IT. They relied on the manual controls rather than the IT ones. Many auditors and finance directors will remember the auditor’s systems diagrams used to chart companies accounting systems showing a box with data going in and data coming out.

Such ‘black box’ auditing now seems laughable. But in the same way that auditors adopted this approach to computerised accounts, stakeholders have a similar attitude to the governance of the auditing profession. As a society we have regulated the edges of the auditing profession by demanding certain standards, but auditors have not been under enough pressure to prove themselves to the investment community. Beyond that, do they have the systems in place to ensure they perform a quality audit?

Despite the auditing profession’s best efforts, this privileged approach to their professional life has eroded over the years because they have been forced by politicians and regulators to open up to the public gaze.

The latest example of this scrutiny is statutory transparency reporting by auditors of listed companies. This legislation is driven by the European 8th Company Law Directive on the regulation of auditors, which was agreed in June. The measures have to be in place by the end of June 2008.

Transparency reports will cover three areas: financial information, governance/organisation and quality, and will cover the entire firm, not just the audit practice. According to the Professional Oversight Board (POB), the idea is to help investors to understand the strengths of particular audit firms.

This issue of audit quality is being explored by the POB and the Accounting Principles Board. They are developing a public consultation on the drivers of audit quality. Setting out such drivers may assist the audit firms to cope with enforced transparency.

Until a few years ago, most audit firms published little information about themselves, aside from incomparable and limited figures released to the press so that league tables could be constructed. Two specific factors have driven a more sunshine policy. First, most firms have become limited liability partnerships (LLPs) in recent years. The privilege of LLP status came at the price of producing sensible reports and accounts. Second, the UK government’s 2003 review of auditing in the wake of Enron decided that there was a legitimate public interest in public information of firms that audit public entities. In response, 13 of the 20 largest firms gave a voluntary undertaking to meet government proposals for transparency reporting. This they have done.

However, the presentation is scattered and is as much about promotion as it is information. Often, it is not couched in specific enough terms for those seeking to make a judgement about audit quality.

Transparency reports will provide public information on issues such as the firms’ processes and practices for quality control, for ensuring independence, for partner remuneration and on their governance and network arrangements. The audit profession needs to see the transparency regulations of the 8th Directive as its Combined Code. The time for proper corporate governance of the auditing profession has arrived.