Auditor Scepticism.
Martyn Jones
17 September 2010
Key points
• Current hot topic
• The opportunity for debate is welcome
• Much is already happening to improve the application of auditor
scepticism
• There are some ‘red herrings’
• But there is scope for more than can be done
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2
Significance of scepticism
Paramount importance
to auditors
Essentially a
behavioural issue
Strong connection
with need for
good ethics
Also connected
with need to
find fraud
Important to investor
confidence
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3
Symptoms of unethical behaviour
Overly dominant management
Someone who talks too much and who always wants to know where you
have got to on the audit
Extravagant lifestyle and behavioural change
Excessive gambling
My wife has a private income or we have won the lottery or something
similar
Never takes holidays or records in a mess
Starts early and finishes late
Insomnia
Doesn’t allow others to do their work
Someone who avoid meetings us or stops us gaining access ourselves
An attempt to “bribe” you
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4
Symptoms of unethical behaviour
Inconsistencies
Override of
normal
procedures by
senior
management
Backdating
Involvement of
related parties
Destruction of
documents
Business not
conducted on
normal terms
Photocopied
documents
Entries with no
or thin
documentary
support
Large or
unusual
entries near
period ends
Business
model does
not make
sense
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5
Symptoms of lying
Eye signs
(avoiding eye
Talking quickly
contact and
looking up and to
the right)
Nervousness
Voice changes
(fidgeting,
(higher pitch,
scratching,
Hands on face
pausing or
itching or
particularly over
stuttering)
sweating)
the mouth
Posture (not able
to stand still,
tight posture or
hands turned
down)
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Overstated
friendliness
Illogicalities and
strange excuses
6
Auditor scepticism is now high on the agenda
Aftermath of the global liquidity meltdown
Impact of austerity on public sector
Need to increase trust in business
Continued economic difficulties
EC Green Paper on Lessons from the Crisis
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7
Auditor scepticism is now high on the agenda
AIU public reports: comparison with other firms
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8
Auditor scepticism is now high on the agenda
Audit of client
money
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Repo 105
Loan
provisions
Going concern
9
APB suggestions for debate
Presumptive
doubt instead
of enquiring
mind
Non
acceptance of
client
schedules
Auditors
afraid to bill
clients for cost
overruns
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Changes to Ethical
Standards (e.g.
Restricting
provision of nonaudit services)
10
EC suggestions for debate
More comfort
on financial
health of
companies
More dialogue
with internal
auditors and
the audit
committee
More and earlier
reporting to
stakeholders
Making ISAs
legally binding
Appointment
by third party
Maximum
length for audit
firm’s
engagement
Prohibition on
non audit
services
Maximum fee
level from single
client
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11
EC suggestions for debate
Pan European
supervision
Mandate rotation
of firms
Balance sheet
substantive testing
only
Joint audits
including non
systemic firms
Changes in
structure of market
Pan Europe
passport
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12
So what’s the evidence?
Academic Research
Source: Beattie, Vivien, Fearnley, Stella and Hines, Tony
“Auditor/company interactions in the 2007 UK Regulatory
Environment”, April 2008
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So what’s the evidence?
Source: The Deloitte CFO Survey: 2010 Q2 results
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14
So what’s the evidence?
Source: The Deloitte CFO Survey 2010 Q3 results
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15
Is there an alternative to presumptive doubt?
Clarified ISAs
Enquiring
Mind
+
•
•
new standards already released
not apply until periods ending
on or after 15 December 2010
No opportunity for their
effectiveness to be tested
Other regulatory
measures
•
•
•
•
•
•
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Companies Act auditor offence
Ethical Standards
Audit Firm Governance Codes
AIU inspections
FRRP referrals
Audit Firm Transparency reports
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Some key revisions in the Clarified ISAs
Management override is a
significant risk
More work required if
anomalies identified
Tough new standard on
confirmations
More fraud and risk-based ISA
on related parties
Much tougher ISA on groups
Tougher stance
on management
representations
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17
Some key revisions in the Clarified ISAs
Investigate
conflicting
explanations
Objective based
approach to ISAs
Communicate
significant
deficiencies in
internal control
and significant
difficulties
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Audit of accounting
estimates
Document
rationale for
significant
professional
judgements
18
Some things we do to assist scepticism
Involvement of
forensic
specialists
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Data analytics
Sharing of ideas
by financial
institutional
specialists
Accelerate work
on significant
risks and
disclosures
Identify subpopulation of
audit interest
and focus
testing on these
sub-populations
Monthly training
session
19
Some thing we do to assist scepticism
Professional standards
review
Independent Review
Partners
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Whistleblowing facility
Encouraging our more
senior people to
mentor on scepticism
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Some things we do to assist scepticism
Electronic processes for
checking audit file
completeness
Consultation culture
Industry support
Additional specialist and
quality reviewers
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21
Some things we do to assist scepticism
Regulation
Assurance
Reviewers
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Partner
rotation
Tough
independence
processes
Variety of work
for our people
22
However more can be done
Guidance for directors
and auditors on
impairment
Avoidance of yet
more box ticking
requirements
Guidance on
understanding the
business model –
barely mentioned in
ISAs and Practice notes
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23
However more can be done
Support for the IASB in
its work on changing
current accounting for
losses incurred to losses
expected
Targeted and focused
assurance reporting
Debate a more
meaningful role for
auditors on narrative
reporting
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24
However more can be done
Increased communication between regulators and auditors
Targeted and focussed assistance engagements
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25
Some other views
Qui Chen, Khim Kelly and Steven Salterio
Changing the nature of the evidence collected and more critical questioning helps but
merely extending the extent of the sample does not
Karen A Van Peursem
Need to draw on the understandings of ancient sceptics to understand why audits
failed
Geoffrey George and Francis Malone
Need for a forensic phase in all audits
Treasury Select Committee
Little evidence to suggest that auditors failed in their duties in the run up to the
financial crisis
Public Company Accounting Oversight Board
The firm have frequently strayed from the PCAOB’s standards in issues related to
revenue management's accounting estimates, fair value measurements and
materiality thresholds
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Some red herrings
Limit on Big 4 FTSE audit
appointments
Mandatory joint audits
Independent appointments
board
Further outright prohibition on
non audit services
Mandatory firm rotation
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27
Some other red herrings
Earlier reporting to
stakeholders
Pan European supervision
Balance sheet substantive
testing only with reliance on
internal auditor for controls
work
More rules-based
approach
There needs to be sufficient scope for properly documented professional
judgements
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Relevance to business schools and accounting departments
Further research
Development of skills
Possible skills to develop further may include mentoring, communication,
more sceptical behaviour, critical questioning, challenging business models
and analytical procedures
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29
Suggested next steps
Increased focus on
implementation of the
clarified standards
© 2010 Deloitte LLP. All rights reserved.
More focus on
behaviour and on
communication issues
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Bibliography
Clarified International Standards on Auditing (UK and Ireland) http://www.frc.org.uk/apb/publications/clarified.cfm?cat=68
Fraud and Audit: choices for society
http://www.frc.org.uk/images/uploaded/documents/Fraud%20and%20Audit%20-%20Choices%20for%20Society%20_final_1.pdf
Audit of banks: lessons from the crisis
http://www.icaew.com/index.cfm/route/172480/icaew_ga/Technical_and_Business_Topics/Thought_leadership/Inspiring_confidence_in_fin
ancial_services/Audit_of_banks_lessons_from_the_crisis/pdf
Discussion Paper 'Auditor Scepticism: Raising the Bar‘
http://www.frc.org.uk/images/uploaded/documents/Discussion%20paper%20Auditor%20Scepticism%20-%20raising%20the%20bar21.pdf
Banking crisis: regulation and supervision: Responses from the Government and Financial Services Authority to the Committee's Fourteenth
Report of Session 2008-09
http://www.publications.parliament.uk/pa/cm200910/cmselect/cmtreasy/47/47.pdf
Do Audit Actions Consistent with Increased Auditor Scepticism Deter Potential Management Malfeasance? , Qui Chen, Khim Kelly and Steven
Salterio, 2009
http://aaahq.org/meetings/AUD2010/AuditActionsConsistentWithIncreasedAuditorScepticism.pdf
Dairy containers’ New Zealand Audits 1981-1989 Pyrrhic Victory for the Ancient Sceptic, Karen A Van Peursem
http://www.victoria.ac.nz/sacl/6ahic/Publications/6AHIC-33_FINAL_Paper.pdf
Auditors and corporate failure: an analysis of the AWA and HIH failures in Australia and the Role of the Auditors, Geoffrey George and Francis
Malane
http://reference.kfupm.edu.sa/content/a/u/auditors_and_corporate_failure__an_analy_86455.pdf
EC Green Paper - Consultation on audit policy - Lessons from the Crisis
http://ec.europa.eu/internal_market/consultations/docs/2010/audit/green_paper_audit_en.pdf
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Biographical details
Martyn Jones
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BSc Hons, FCA, FRSA
Trained with Robson Rhodes and Deloitte Haskins & Sells and qualified with ICAEW in 1976
Lecturer then Head of Centre, Accountancy Tuition Centre 1977-1981
Under-Secretary then Secretary UK and Ireland Auditing Practices Committee 1981-1984
UK and Irish Technical Adviser to International Auditing Practices Committee 1983-1984
National Audit Technical Partner, Deloitte UK 1987Member DTTL global Audit Technical Advisory Board
Chairman Deloitte Corporate Governance Services Group and of Quality Group on Sustainability and
Carbon Reporting
Chairman Consultative Committee of Accountancy Bodies Ethics Standards Group
Chairman International Standards on Auditing Implementation Sub-Group
Chairman Advisory Group for International Standards on Auditing methodology, software and training
providers and of Stakeholder Panel on stewardship assurance reporting
Chairman Institute of Chartered Accountants in England and Wales (ICAEW) Ethics Standards Committee
and Deputy-Chairman of ICAS Working Group on non-audit services
Member ICAEW Technical Strategy Board and of its Council
Member Audit Quality Forum
Member Confederation of British Industry’s Companies Committee
Member Auditing Practices Board’s working group on going concern issues during the current economic
conditions and of its International Committee
Member Policy and Regulatory Group (Big 4 + 2)
Member Swansea University School of Business and Economics Advisory Board 2009-
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Member of
Deloitte Touche Tohmatsu