RELIABILITY OF AUDITED FINANCIAL
STATEMENTS
RELIABILITY AND THE ROLE OF THE AUDITOR
This paper is born out of a sense of surprise and disappointment among participants at an Audit
Quality Forum meeting that the concept of reliability had disappeared from the conceptual
frameworks of financial reporting standard setters. Historically, financial reporting conceptual
frameworks have described reliability as a ‘desirable qualitative characteristic’ of ‘decision-useful
financial statements’ to be traded off against relevance. Reliability has recently been superseded
as a concept by the narrower concept of ‘faithful representation’.
In looking at reliability and the role of the auditor, this paper adopts a new approach. It is not a
contribution to debates about the conceptual framework of financial reporting standard setters. Nor
does it repeat material in auditing standards about the importance of reliable audit evidence.
It starts instead from the observation that reliability matters to users of audited financial statements.
Academic research on the views of investors and other stakeholders in the financial reporting
process indicates that users look to auditors to bring reliability to that process. This is also
supported by our discussions with investors during the early stages of this project.
Put simply, there is an expectation that ‘audited financial statements should be reliable’. This
simple statement might initially set alarm bells ringing among auditors but it surely reflects what
people reasonably expect from audited financial statements and, as a result, sets a context for
thinking about the responsibilities and accountability of the audit function. To say that ‘these
audited financial statements are unreliable’ would be very likely to invite a response that the
financial statements in question had not been audited properly.
Our simple statement also appears much more attractive, and almost certainly resonates more
with users, than conventional definitions of audit to the effect that ‘the audit provides reasonable
assurance that the risk of material financial statement misstatement has been reduced to an
acceptable level’.
Of course, we need to acknowledge that when we say ‘audited financial statements should be
reliable’ we strictly mean ‘audited with a clean opinion’ and, of course, the statement is not saying
that unaudited financial statements cannot be reliable or that audited financial statements do not
have other desirable attributes apart from reliability.
This paper explores what might be involved in making the concept of reliability central to auditing.
In particular, were auditors to be seen as champions of reliability in financial reporting, then it
would involve them in taking greater responsibility for, and ownership of, their work but it could also
enable them to take a more active role in a wide range of debates, for example, about reporting
standards and rules which they might currently feel unable to challenge.
In building up a picture of what the statement ‘audited financial statements should be reliable’
means, we identify and discuss five key aspects of reliability and draw on insights from other areas
of activity outside auditing where reliability plays an important role. We suggest that reliability
involves:

Faithful representation: As a starting point, we consider the concept of faithful representation
in the International Accounting Standards Board (IASB) Conceptual Framework (the
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Conceptual Framework). Auditors need to ensure that information is faithfully represented in
accordance with accounting standards. This is challenging because of the growing complexity
of financial reporting and valuation techniques. We illuminate the challenges by drawing on
some of the characteristics of reliability in research methodology such as consistency and
repeatability of measurement.

Fitness for purpose: Reliable audited financial statements need to be fit for purpose. Auditors
have a responsibility to understand the purpose for which information in financial statements is
intended to be used and to consider whether the information, as presented, is reliable for this
purpose. With this in mind, auditors need to judge whether compliance with legal rules and
accounting standards is sufficient to ensure that audited financial statements are reliable. In
this context, we draw on useful insights from the field of reliability engineering.

Robustness: The objective of audited financial statements is highly contentious and no matter
what legislators and accounting standard setters say about the purpose of audited financial
statements, the information they contain is still used in other, sometimes unpredictable, ways.
How information is being used is not always well understood and auditors therefore need to
engage with users and see what they are actually using financial reporting information for. We
draw on insights in the field of software and systems reliability, a subset of reliability
engineering, where there are similar challenges.

Organisational reliability: The information contained in audited financial statements is
important and auditors have a vital role to play in making sure that this information is reliable.
This doesn’t prove, however, that organisations generally publish reliable information or that
they are reliable organisations. Yet auditors should be concerned about the reliability of the
organisations they audit because from a risk management view point, do they really want to be
associated with organisations that produce unreliable information, whether it is to be audited or
not, particularly given the significance of some information to users? This is particularly
pertinent given the idea that the audit has a ‘halo effect’ and auditors are, in effect, seen as
‘reputational intermediaries’. By association, they will be seen as giving organisations an aura
of being reliable and producing reliable information even if they are not. We draw on the High
Reliability Organisations (HRO) literature here to look at the organisational characteristics that
auditors should be looking for.

Auditor behaviour: Things can go wrong because information is not faithfully represented or is
not fit for its intended purpose or is not reliable for other purposes that it is being use for or
because reporting organisations are not reliable. When this happens, audit firms pay a heavy
price through loss of reputation and so how can they avoid this by addressing the challenges or
reliability? Audit firms need a successful mix of, on the one hand, organisational process,
discipline, control and method and, on the other hand, experience and intuition to know when
something is not right. This brings its own challenges. For example, how can audit firms train
and inspire auditors to achieve the right combination of discipline and flair? The characteristics
of HROs as applied to audit firms are relevant here and we also draw on insights from
behavioural psychology and its application to auditing.
Auditors do not face an easy task if they are to focus on reliability in all its aspects. However,
thinking about the tangible steps auditors can take to address the challenges involved could
provide a new lens through which to see longstanding issues around audit expectation gaps,
auditor scepticism and audit quality.
In the following sections we look in more detail at our five key aspects of reliability in auditing
before considering next steps.
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FAITHFUL REPRESENTATION
Reliability and measurement
The Conceptual Framework replaced the concept of reliability as a fundamental qualitative
characteristic of financial reporting information with that of faithful representation. The IASB
explained that this was as a result of a lack of understanding about what reliability meant and led
the IASB and the Financial Accounting Standards Board (FASB) to think about how they could
better convey what it meant – they chose the concept of faithful representation.
According to the Conceptual Framework, financial information must faithfully represent what it
purports to represent. Faithful representation has three characteristics: completeness, neutrality
and freedom from error.
The characteristics of faithful representation have similarities to the concepts of reliability and
validity in research theory and methodology. Here reliability is a fundamental concept with
characteristics of repeatability, consistency and measurement. The quality and consistency of
measurement is important – a measure is reliable if it would give the same result over and over
again. The concept of reliability is used in a very narrow sense in this literature but it is coupled
with the concept of validity which is about whether the means of measurement are accurate and
whether they are measuring what they are intended to measure.
The idea of faithful representation in accounting and the concepts of reliability and validity in
research theory and methodology highlight the need for data to be capable of consistent
measurement and for appropriate measurement methods to be applied.
Challenges for auditors
For audited financial statements to be reliable, information must be capable of consistent
measurement and, in accordance with relevant accounting standards, must be faithfully
represented in financial statements. Measurement is important and auditors therefore need to
ensure that they apply the appropriate measurement methods prescribed by law, accounting
standards and supporting conventions to ensure that information is properly put together.
In recent years, the world of financial reporting has seen increasingly more complex transactions
and significant changes in how information should be accounted for and presented. The rise of fair
value methodology with complex valuation techniques poses significant challenges for auditors.
They need to assess the appropriateness of these methods of valuation as well as consider
whether technically complex valuations have been done properly and whether the right sources of
information have been used. Auditors need the right skills for this and must strike the right balance
between using their own judgement and relying on other experts.
FITNESS FOR PURPOSE
Reliability and uses of information in audited financial statements
Reliability is not just about faithful representation. While applying measurement techniques
properly and auditing complex calculations is vitally important, users of audited financial
statements are rarely looking at individual numbers in isolation without having an overarching
purpose in mind. The measurement of an individual asset is in effect just one of many tools for
users to rely on for a specific purpose. For audited financial statements to be reliable they must be
fit for purpose.
As David Tweedie wrote back in 1977: ‘Accounting … is only a medium of communication. Its
purpose is not to provide stimulating intellectual exercise for those who do it, not to give them a
pleasant means of passing the time. If it does not meet the test of telling the reader something
which will help him, it fails in its primary purpose.’
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Auditors therefore need to have a clear understanding of the purpose of audited financial
statements as prescribed by legislators and accounting standard setters and must also be in a
position to judge whether the information as presented is reliable for this purpose.
This ‘fit for purpose’ requirement is something that is very evident in the field of reliability
engineering. Products must be fit for their intended function and their reliability is measured against
a specification of requirements. The engineering perspective draws attention to the fact that
financial statements are meant to be useful. The engineering field may also provide helpful insights
into dealing with difficult questions in financial reporting such as how is reliability measured, how
reliable does specific information have to be and what are the costs and benefits of different levels
of reliability?
Challenges for auditors
Interestingly, the link to engineering ‘fitness for purpose’ is picked up in the accounting literature.
Stephen Penman argues that: ‘Simply put accounting is a product, and the understanding of good
accounting or bad accounting is a matter of understanding its product features from the point of
view of its customers ... Just as a new drug is tested, with side effects noted, so must accounting
be judged by how it helps or hinders its users’. For audited financial statements to be seen to be
reliable, the information provided in them must meet the needs of users. Penman has a very clear
view that user needs are about the evaluation of equity investments although different legislators
and standard setters may have different views.
There is lots of debate in the accounting literature about the purpose of audited financial
statements. Stephen Zeff’s forthcoming paper, to be presented at the annual ICAEW Information
for Better Markets Conference in December 2012, explores the history of efforts to identify the
objectives of financial statements.
The IASB’s Conceptual Framework says that the purpose of audited financial statements is to
provide financial information that is useful to existing and potential investors, lenders and other
creditors in making decisions about providing resources to the reporting entity. These decisions
involve buying, selling or holding equity and debt instruments, and providing or settling loans and
other forms of credit.
While the Conceptual Framework has a clear view of the purpose of audited financial statements,
in reality, there appears to be little understanding of exactly how the information in audited financial
statements is used for this purpose. Auditors are therefore likely to face situations where financial
reporting standards and conventions appear to permit or even require accounting treatments that
do not seem fit for the purpose that the information is supposed to be used for. This is not meant to
be a criticism of standards because standards can never cover every eventuality. But it does
suggest that auditors need to be proactive and engage with standard setters and other
organisations when they have concerns about whether standards are meeting their supposed
purpose. They cannot just stand aside, or hide behind the rules set out in accounting standards.
These issues have already provided a rich vein of discussion at recent Audit Quality Forum
meetings.
ROBUSTNESS
Reliability and the importance of communication
Fitness for purpose is clearly important for users of audited financial statements but unlike for
hardware products which have a clearly defined purpose which enables their reliability to be easily
measured, the very objective of audited financial statements is highly contentious. Even among
those who believe that audited financial statements are meant to serve the needs of providers of
capital, there is vigorous debate about the relative importance of stewardship and buy-sell
decisions and differences between debt and equity providers. In addition, expectation gaps exist
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about the extent of the responsibility that preparers and auditors have for preventing and detecting
fraud or for giving comfort to users that organisations will remain solvent for the foreseeable future.
No matter what accounting standards setters say about the purpose of audited financial
statements, information in audited financial statements is used in different and sometimes
unpredictable ways for different purposes. Research by Joni Young in 2006 supports the idea that
auditors and preparers of financial information do not fully understand how that information is used
and while auditors are powerless to stop this, they should be alert to the problem and take all
reasonable steps to address the robustness of audited financial statements in the face of the
resulting uncertainty.
In this respect, software and systems reliability – a subset of reliability engineering – can provide
some helpful parallels. In software and systems reliability it is often difficult to determine exactly
how software is intended to operate or to replicate it in different contexts and human intervention
makes it more unpredictable. Achieving reliability in software systems is particularly challenging yet
vitally important. Reliability may be tested and confirmed in a particular context but it is difficult to
say that the system will perform acceptably in another similar context. It may depend on the way it
is used and how other applications being used at the same time might affect it.
Challenges for auditors
Unpredictability of use poses challenges for auditors. How can auditors anticipate all the purposes
for which information in audited financial statements might be used? Equally challenging is the fact
that not all users of audited financial statements fully understand the scope and purpose of audit
and they have very different expectations of what is meant by reliable audited financial statements.
However, from looking at the literature on software and systems reliability auditors may have
something to learn from the software development market’s focus on robustness of software and
how it addresses reliability issues.
Software developers make significant use of online communities and through the use of digital
technology and webcasts and webinars, these communities bring together users with a shared
sense of purpose to provide feedback, discuss issues, improve communication and develop
solutions to problems. Another example is that of open source software, where software
developers publish their software with an open source license allowing others to create
modifications to it, understand its internal functioning and share it with others. This approach can
help produce reliable, high quality software quickly and inexpensively.
This analogy provides strong support for the need for good communication channels and
engagement with users of audited financial statements and the importance of feedback so that
reliability issues can be quickly picked up and dealt with. There is growing recognition among
auditing standard setters that engagement with users is important. This is evident from recent
initiatives looking at the scope of auditor reporting and which have led to changes in codes and
standards to strengthen accountability and engagement through the investment chain.
What other types of communication and engagement are possible? Is there scope for more direct
communication channels between users and preparers and between users and auditors to
understand how information is used and might such engagement and communication go some way
to helping to address expectation gaps? Auditors are already required to think about the context in
which information is used when considering audit materiality and in setting the scope of the audit
work they perform. More direct engagement with users about how they use audited financial
statements would build on this and enhance their ability to address expectation gaps.
Armed with additional knowledge, auditors might then be able to be more assertive and proactive
about what they put in their audit reports. While traditionalists might not like the idea of disclosing
additional audit work or adding caveats or warnings about the use of information, auditors should
not be criticised for doing this if it demonstrates that auditors are taking their responsibility for
reliability to heart. It would also be in the spirit of current initiatives to make auditors’ reports more
informative.
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ORGANISATIONAL RELIABILITY
The halo effect and the audit
The information contained in audited financial statements is important and auditors play a vital role
in making sure that this information is reliable. But the audit itself only focuses on a limited amount
of the information that is published by organisations and it does not prove that organisations
generally publish reliable information or that they are reliable organisations. Should auditors be
concerned about the reliability of the organisations they audit and other unaudited information that
these organisations publish?
From a risk management perspective, the answer is surely yes because how many auditors would
really want to be associated with organisations that produce unreliable information, whether it is to
be audited or not, particularly if this information is significant to users? The reason why auditors
should be worried is because the audit has a ‘halo effect’.
The halo effect is a term invented in the 1920s by psychologist Edward Thorndike to explain a
cognitive bias that plays a large role in influencing our views of people and situations. From an
auditing perspective, the audit not only influences users’ views about the reliability of the financial
statements. Because it is seen as something to be trusted, it can also impact how users of audited
financial information view the reliability of organisations as a whole and other information that they
publish. A clean audit opinion may lead to an impression being formed that the organisation and its
management are reliable because if they weren’t, then investors would expect the auditors to have
done something about it, for example resign or qualify their opinion. The effect is reinforced by the
fact that there are very few qualifications in audit reports.
To echo a phrase used by John Coffee, auditors are seen as ‘reputational intermediaries’ and, by
association, they are seen to give organisations the aura of being reliable and producing reliable
information even if they are not. These views are rooted in the reputation of audit firms rather than
in the reputations of the audited organisations themselves. Reputational intermediaries play a vital
economic role in markets by reducing the amount of resources that investors need to devote to
ascertaining the reliability of investee companies and the information they report.
Challenges for auditors
The expectations of reliability that we have described are difficult for auditors to manage. Where
auditors identify adjustments to be made to the audited financial statements because of an
organisation’s inability to get the numbers right then surely they must also question the reliability of
other information that the organisation is publishing. Where that is the case, they should be
concerned.
This suggests that auditors need to assess the reliability of the organisations that prepare the
financial statements they audit as well as the significance of other information they publish. Unless
they do this, then accidents are likely to happen that will cause users to doubt whether audited
financial statements themselves are indeed reliable.
If we want to understand the characteristics of organisations that are needed to make them
reliable, then we can gain an interesting perspective from looking at the high reliability organisation
(HRO) research literature. This body of literature looks at organisations that really can’t afford to
make any mistakes, for example in the nuclear and aviation industries and certain branches of the
military. Similarly, a company cannot afford to get its communications to investors and
shareholders wrong and auditors need to be mindful of this because their reputations are also at
stake if this happens.
The Berkeley School on HROs identified conditions and relationships associated with consistently
achieving very reliable operations. This relatively new field of work highlights the role of
organisational structure and culture in developing and maintaining high levels of human
performance in the face of extraordinary demands. These HROs appear to demonstrate a culture
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of reliability, with shared perceptions, norms and informal traditions and employees who work to a
clear common purpose and a goal of collective performance. Safety, accountability,
interdependence, responsibility, continuous training and redundancy (in the ‘belt and braces’
sense) are common characteristics. From a socio-psychological perspective, HROs create a
collective state of mindfulness and manage the unexpected by using processes such as a
preoccupation with failure, commitment to resilience and deference to expertise.
Much of the HRO literature is based on organisations with highly complex operating and technical
systems where failure could lead to considerable suffering, either by employees or the public. The
conditions are therefore extremely demanding and are likely to be beyond the skill and capacity of
many organisations. However, it draws attention to certain characteristics that might help create
confidence in an organisation’s ability to produce reliable information, such as accountability,
responsibility, continuous training and a focus on the skills, experience and technical competence
of employees. Auditors may consider whether the organisations they audit have these qualities as
part of their overall client acceptance procedures.
Furthermore, HROs have significant involvement with stakeholder groups and this is seen as
crucial to instilling trust. Users of audited financial statements likewise value direct and regular
communication channels with management. As already highlighted, they may value more direct
engagement with auditors too.
AUDITOR BEHAVIOUR
Auditor attributes and the audit process
In the four previous sections we have identified challenges that auditors face as a result of giving
reliability a central role in auditing. So, what are the behavioural qualities of auditors and the
organisational strengths of audit firms that we would expect to see in order to overcome these
challenges?
As reputational intermediaries, auditors face huge reputation risks from perceived audit failures or
from being associated with unreliable organisations. When information is not faithfully represented,
not fit for its intended purpose, not reliable for the other purposes that it is being used for, or
organisations are not reliable, then users of that information will believe that the expert systems
that they have placed their trust in have failed. This can have devastating consequences not only
for audit firms but also for confidence in other organisations those firms audit and for trust in the
market as a whole. While they should consider the reliability of the organisations they audit, they
should also take steps to ensure that their own audit firms are reliable reputational intermediaries.
What are the behavioural and organisational characteristics of auditors and audit firms that can
help with this?
There is a significant amount of behavioural literature relating to auditing that looks at issues such
as how auditors overcome inherent biases and what professional judgement means. Rather
usefully, the insights that underpin much of this literature have recently been summarised in Daniel
Kahneman’s best-selling book Thinking, fast and slow (2011) on the psychological research behind
behavioural economics which earned him his Nobel Prize. Kahneman introduces the idea of two
‘systems’ of thinking and looks at how people apply these different systems of thinking in different
situations.
System 1 is fast thinking, where thoughts come automatically and quickly. System 1 does not think
statistically, but is more intuitive, relying on heuristics (rules of thumb), perception, memory or
expertise and experience. According to Kahneman, however, the spontaneous search for intuitive
solutions sometimes fails when neither an expert nor heuristic solution comes to mind. In such
cases people will often switch to a slower more deliberate and effortful form of thinking. This is
system 2 thinking which is all about the ‘conscious reasoned self’. System 2 requires attention and
can involve complex calculations and concentration.
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Why do users of financial statements believe that the audit helps to make those statements
reliable? Auditors are considered to be experts. They are expected to use professional scepticism
and judgement, understand complex standards and are trained to have the experience and
expertise to provide an opinion on the financial statements. Their work is supported by a structured
audit process which follows internationally accepted standards.
Auditors therefore apply the two systems of thinking. They have clear organisational processes
and with the help of auditing and quality control standards, they can use discipline and control to
apply system 2 ‘slow thinking’ to slow things down and question, for example, financial statement
assertions, stand back from the financial statements and help keep in check any bias. Some of the
HRO characteristics outlined in the previous section such as continuous training, a focus on
accountability and the skills, experience and technical competence of employees would seem to be
useful for audit firms in assessing their own organisational strengths and quality control systems.
Auditors also need to use experience, intuition and ‘an auditor’s nose’ to know when something is
not right. This system 1 ‘fast thinking’ and the ability to spot things that others would not is
developed through a combination of expertise and experience.
Challenges for auditors
A key question is whether training practices and quality control processes in audit firms support the
behavioural characteristics associated with reliability. In particular, as well as instilling a methodical
and deliberative approach, is the fast intuitive thinking based on experience and expertise being
passed on to successive generations of auditors? Do these auditors feel inspired to be auditors
and use these skills to best effect?
Thinking about these issues also provides a useful insight into the concept of scepticism. Auditors
need to be sceptical in two ways: they need to be able to overcome biases and be methodical in
their approach to their work to ensure nothing is missed. But they also need to have a sense of
when to ask more questions or query evidence when things do not feel quite right.
Audit firms need to think about the extent to which fast thinking is based on intuition and insight as
a result of experience and expertise rather than simply being a misleading heuristic or bias. This is
very difficult to measure and monitor. Firms must also consider whether their auditing practices
have the right balance of the two systems of thinking? Auditors are increasingly perceived as
having a preoccupation with compliance and box-ticking. If auditors want to avoid this fate then
they will need to examine their own behaviour, be positive about what they do and through
effective training ensure that their skills are passed on.
NEXT STEPS
The importance of reliability
This paper is based on a simple premise that ‘audited financial statements should be reliable’ and
it is clear that the concept of reliability is of real interest to a wide variety of audit stakeholders.
There are many quotations and references that we can point to which refer to the need for reliable
financial information and the role of audit and which reference the five aspects of reliability that we
have discussed. For example, James Doty, chairman of the US Public Company Accounting
Oversight Board has said in his speeches that: ‘auditors confirm the flight-worthiness of the engine
of reliable financial data that drives our economy. They are an integral part of the basic checks and
balances in the system.’ and ‘Reliable financial and economic data is one of the fundamental
assumptions of American society …Our system of capital formation relies upon the confidence of
millions of savers to invest in companies they trust’.
Research in 2010 by the Maastricht Accounting, Auditing and Information Management Research
Center also concluded that investment analysts generally perceive that the auditor’s work is
valuable to them by increasing their confidence in, and reliance on, financial statements.
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Reliability therefore plays a central role in auditing and this paper considers the consequences for
auditors. Theirs is not an easy task and the paper highlights the practical challenges that a
responsibility for reliability brings. Yet as difficult as they may seem, these challenges help to focus
the mind on the tangible actions that auditors can take to embrace their responsibilities and these
actions ultimately provide a better focus for some longstanding and seemingly insoluble audit
issues, such as how to deal with expectation gaps and instil scepticism and what is meant by audit
quality.
A summary of the challenges
Auditors should apply the methods prescribed by relevant standards, conventions or frameworks to
ensure that information is properly compiled and measured. They need to use their expertise to
understand and properly apply the techniques used and to re-perform complex valuations. They
need to use their judgement about when expert advice may be needed and to what extent they can
rely on this.
As well as this, auditors need to understand the purpose of audited financial statements and judge
whether the information presented is reliable for this purpose. In so doing, auditors should consider
whether they believe that compliance with accounting standards is sufficient to ensure that the
information is reliable for this purpose and at times may feel frustrated by what they may see as an
inability of standards to clearly reflect the purpose for which the information in the audited financial
statements is actually being used. This is not necessarily a criticism of financial reporting
frameworks or standards as they cannot cover every eventuality. But it does make the role of
auditors more challenging because they cannot simply hide behind rules and accounting
standards.
Even so, the objective of audited financial statements is highly contentious. No matter what
legislators and accounting standard setters say about the purpose of audited financial statements,
in reality information in audited financial statements is used in varied and sometimes unpredictable
ways. Neither auditors nor preparers of information fully understand how information may be used.
Auditors need to be aware of the expectation gaps which they may therefore fall prey to, and these
are particularly evident around their responsibilities in relation to going concern and fraud. With this
in mind, they have a responsibility to engage proactively with users to understand how they are
using the information in audited financial statements. Armed with this knowledge they need to think
about whether this information is reliable for these purposes and if not, whether they must be more
bold and warn of the limitations of using it for these purposes. By giving a greater voice to users,
auditors can help manage expectations and deal with issues in a more proactive way.
The information contained in audited financial statements is important and auditors play a vital role
in making sure that this information is reliable but the audit does not prove that organisations
generally publish reliable information or that they are reliable organisations. Yet auditors should still
be concerned about this because from a risk management view point, do they really want to be
associated with organisations that produce unreliable information, whether it is to be audited or not,
particularly if they know the significance of this information to users? This is pertinent given the
idea that the audit has a ‘halo effect’. Auditors are, in effect, seen as reputational intermediaries
and, by association, they give organisations the appearance of being reliable and producing
reliable information even if they are not. Users of audited financial statements make wider
assumptions about the reliability of organisations and their outputs which are rooted in the
reputation of audit firms rather than the organisations themselves. In their client acceptance
procedures auditors therefore need to think widely about the qualities of the organisations they
audit, their ability to produce reliable information and the significance of other information outputs.
If an organisation cannot deliver reliable information then auditors must question whether they
really should continue to work with them.
Finally, auditors and audit firms need to assess whether they are geared up to meet these
challenges. Audit firms pay a heavy price with their reputation if audited financial statements or
indeed other information published by organisations is not reliable. Auditors and audit firms need to
ensure that they have the appropriate behavioural and organisational characteristics to ensure that
they are reliable. Auditors should therefore focus on their own organisational strength and
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reliability. Audit firms need a successful mix of, on the one hand, organisational process, discipline,
control and method and on the other hand, experience and intuition to sense when something is
not right. But this brings its own challenges of how they train and inspire auditors to achieve the
right combination of discipline and flair.
The need for shared responsibility
We have set out some significant expectations of auditors in this paper but to meet many of these
expectations, we need to give auditors a collective voice and an opportunity to be heard. We need
to listen to what they say are the difficulties involved in fulfilling a role as champions of reliability if
we want to support the statement that ‘audited financial statements should be reliable’. The Audit
Quality Forum, with its broad range of stakeholder representatives, is well placed to explore these
issues further. In particular, the Forum provides an opportunity to ask other stakeholders whether
as companies, investors, legislators, regulators and standard setters they are doing everything
they can to enable auditors to stand behind the reliability of audited financial statements.
If you have any comments on this paper and would like to respond to us then please contact
louise.sharp@icaew.com.
FURTHER READING
In developing this paper, we have drawn on the following sources of information which readers
might wish to explore further.
Faithful representation
The latest iteration of the International Accounting Standards Board’s Conceptual Framework for
financial reporting (2010) replaces the concept of reliability with that of faithful representation and
explores the characteristics of faithful representation.
The following website and papers provide a useful source of information about the concept of
reliability in research theory and methodology:



W M Trochim, The Research Methods Knowledge Base, 2nd Edition,
http://www.socialresearchmethods.net/kb/, (version current as of 20 October 2006)
A Bryman, Social research methods, 3rd edition, 2008, Oxford University Press, Oxford
M Joppe, The research process, 2000
Fitness for purpose
The following websites are devoted to and highlight the importance of the concept of reliability in
engineering:


IEEE Reliability Society, http://rs.ieee.org/
Weibull.com
Exploring the idea of purpose from an accounting academic perspective, Stephen Penman argues
that financial reporting is for the evaluation of equity investment in, Accounting for risk and return in
equity valuation, Journal of Applied Corporate Finance, Volume 23, Issue 2, Spring 2011, pp 50-58
Robustness
The Centre for Software Reliability (CSR) at City University London is an independent research
centre, founded in 1983 (www.city.ac.uk/informatics/school-organisation/centre-for-softwarereliability). Their early research concerned the reliability of software - particularly the problems of
measurement, assurance and prediction of reliability – using probabilistic modeling.
There are a number of articles exploring software reliability, for example:
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Littlewood and Strigini, Software reliability and dependability: A road map, 2000, ICSE 2000,
Proceedings of the Conference on The Future of Software Engineering
J Pan, Software Reliability, Carnegie Mellon University 18-849b Dependable Embedded
Systems, http://www.ece.cmu.edu/~koopman/des_s99/sw_reliability/, Spring 1999
Organisational reliability
There are various articles by Todd LaPorte and others that look at the characteristics of high
reliability organisations. They include:
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T R LaPorte, High reliability organizations: unlikely, demanding and at risk, Journal of
Contingencies and Crisis Management, Vol 4, Number 2, June 1996
T R LaPorte and P M Consolini, Working in Practice but Not in Theory: Theoretical Challenges
Of ‘High-Reliability Organizations’, Journal of Public Administration Research and Theory, 1
(1), 1991, pp. 19-48.
The idea of HROs possessing a collective state of mindfulness comes from K E Weick and K
Sutcliffe, Managing the unexpected; assuring high performance in an age of complexity, 2001,
Jossey Bass, San Francisco.
John Coffee looks at the role of the professions in business and articulates the idea of auditors as
reputational intermediaries in his book Gatekeepers: the professions and corporate governance,
(2006, Oxford University Press).
Auditor behaviour
The idea of fast and slow thinking comes from D Kahneman, Thinking, fast and slow, 2011 and this
work is also informed by his research with Amos Tversky on judgement under uncertainty.
The idea of expert systems is explored by Anthony Giddens in The consequences of modernity,
1990, Polity Press
From more of a behavioural perspective in accounting and auditing research, there is:
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J Shanteau’s work on expert decision makers
J Birnberg’s work on behavioural research in accounting
S E Bonner, Judgment and decision making in accounting, 2008, Pearson
M Power, PD Leake lecture on Fair value: the influence of financial economics on accounting,
2009
L A Maines and J M Wahlen, The Nature of Accounting Information Reliability: Inferences from
Archival and Experimental Research. Accounting Horizons 20 (December): 399-425, 2006
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