IFIAR Survey: Audit Problems a Global Concern

By:
CHRIS GAETANO´╗┐´╗┐
Published Date:
Apr 29, 2014

According to a worldwide survey released on April 10 by the International Forum of Independent Audit Regulators (IFIAR), public company and bank audits around the globe are plagued by deficiencies in critical areas, heightening concerns about how well auditors are fulfilling their role in providing assurance on financial statements. The findings echo the results of the organization’s previous survey, conducted in 2012, which came largely to the same conclusion.

IFIAR is a coordinating body of 50 audit regulators in Africa, the Americas, Asia, Europe, the Middle East and Oceania that includes the U.S. Public Company Accounting Oversight Board (PCAOB).

As part of the survey, IFIAR member agencies in 30 countries reported their inspection findings and organized them into three categories of audit firm activities: audits of listed public interest entities (PIEs); audits of systemically important financial institutions (SIFIs), including global systemically important banks (G-SIBs); and internal systems for firm-wide quality control.

IFIAR stressed that the findings do not necessarily indicate areas where a material inaccuracy was found but, rather, areas in which the auditors did not perform up to standards.

For public interest entities—defined as listed entities, entities that are defined by regulation or legislation as a public interest entity, or entities for which the audit required by regulation or legislation to be conducted is in compliance with the same independence requirements that apply to the audit of listed entities—the most common deficiencies involved fair value measurement, which came up 217 times; internal control testing, which came up 156 times; and adequacy of financial statements and disclosures, which came up 120 times. The results came from 30 member agencies reporting findings from inspections of 989 audits of listed PIEs at 113 audit firms.

For systemically important financial institutions—a financial institution whose failure might trigger a crisis—and global systemically important banks—banks of significant size, complexity and cross-jurisdictional activity—problem areas included audits of allowance for loan losses and loan impairments, which came up 42 times; internal control testing, which came up 39 times; and audits of the valuation of investments and securities, which came up 26 times. The results came from 13 member agencies that provided data on the inspections of audits of 95 financial institutions deemed SIFIs or G-SIBs. The audits were conducted by 29 firms.

The survey also examined firm-wide internal quality control systems. Within these, the most common issues found were engagement performance, which came up 380 times; human resources, which came up 146 times; and independence and ethics requirements, which came up 104 times. The response came from 30 member agencies inspecting 134 audit firms.

Needless to say, IFIAR felt the results were a cause for concern.

 “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,” Lewis H. Ferguson, a member of the PCAOB and the chair of IFIAR, said during a press briefing. “More must be done to improve the reliability of audit work performed globally on behalf of investors.”

However, he stressed that the survey does not provide an adequate basis for a year-over-year analysis of audit quality and, therefore, cannot be said to be a metric for whether audits are getting better or worse around the world. Instead, he said this should be seen as a first step in promoting cross-border audit quality.

Using the information gleaned from the survey, Janine van Diggelen, IFIAR’s vice chair, said that audit firms should take steps to develop “root cause analysis” that will provide firms with a better understanding of the factors that underlie the findings, which includes governance and cultural and behavioral aspects relevant to the deficiencies. Ferguson said that examples of factors firms might examine could include partner workload, the ratio of partners to staff, the ability and availability of experts and compensation structures.

Apart from that, van Diggelen added, “The findings also demonstrate the need for firms to continue improving their auditing techniques, as well as their internal monitoring policies and procedures.”

She went on to note that the fact that so many firms in so many countries face the same problems was particularly troubling.

“There are, of course, differences amongst the firms that were inspected by our members and there are differences between countries, but the big concern we are having, if you look at the findings, is there is so much commonality overall,” she said. “If you add all the inspection outcomes of our members, you see real trends in a sense.”

In the end, Ferguson asked professionals to put the results of the survey into context, noting that audit regulation is comparatively new; the PCAOB is actually the oldest organization in IFIAR.

“This profession is being subjected to a level of scrutiny now, detailed scrutiny, that is both new and probably unique in any way this is being looked at,” he said. “ … So I’m not all that surprised we’re seeing these kinds of things.”

Julian Jacoby, chair of the NYSSCPA’s Auditing Standards Committee, felt that the survey took a fair view of audit firms and said he appreciated the IFIAR’s reiteration that inspection findings don’t necessarily mean audit failures, as there can be a perception that just because an auditor could have done something better, the entire audit was flawed.

Further, he noted that the issues involving fair value accounting, which appeared often in audits of public interest entities, can be common in a volatile economy, considering that people have to look forward and “evaluate what might happen based on what has happened.”

Renee Mikalopas-Cassidy, chair of the NYSSCPA’s International Accounting and Auditing Committee, noted that a lot of the areas where regulators found problems were somewhat recent developments, such as the widespread use of fair value versus historical cost basis of accounting and increasing mandates over internal controls, especially in terms of risk assessment quantification. 

"This is an emerging skill set, so to speak, because everyone documents these issues a little differently,” she said. “... I can understand why these are universal issues because things are developing.” 

"If I had a wish list, I'd go back to historical cost accounting. But that genie's out of the bottle." 

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