IRBA publishes fourth Audit Quality Indicators Report Talent turnover at manager and supervisory level is a growing risk to audit quality

Johannesburg, Thursday, December 8, 2022 – The Independent Regulatory Board for Auditors (IRBA) has published its fourth annual Audit Quality Indicators (AQI) Report. The report is based on data collected from JSE-accredited audit firms. Statistical analysis on data from 13 audit firms from 2018 to 2021 is included in the report.

The lockdown period has seen the average fee recovery dropping from 78% (2019) to 71% in 2020 with only a marginal recovery to 74% in 2021. Non-recovery of fees may indicate, among other reasons, inefficiencies in supervision and project management (time wasted on an audit) or lowballing (discounted fees or fee pressures).

Says Imre Nagy, IRBA CEO: “Companies are reminded that undue downward pressure on audit fees and the inability of firms to recover the full cost of an audit may limit the scope of the audit and negatively impact audit quality. The cost of audit quality cannot be discounted - ensuring that firms can allocate an adequate number of hours and appropriately skilled resources to the audit and across audit risk areas is necessary to reduce audit risk to an acceptable level and ensure high audit quality.”

A second area that stands out in this year’s audit quality indicators report is the sharp increase in staff turnover at supervisory and managerial level with several firms experiencing unusually high staff turnover. South African audit firms, not unlike global firms, are reporting that the battle for talent has intensified.

Says Nagy: “Talent leaving the country due to emigration is increasing. Young families are leaving to seek out more attractive and lucrative opportunities in other countries. Add to this the growth in remote working arrangements facilitated by new technologies and shortage of talent in Western economies and many are taking advantage of foreign-based assignments while working from home. Home is also changing as many young professionals are opting for greater work-life balance and are relocating (semigration) to smaller coastal towns or taking up the nomadic culture of work from anywhere. The pulling of talent with lucrative offers that tap into these trends is a growing pain point for South African audit firms as firms need to find innovative ways to support new partners and their engagement teams to ensure continuity in high audit quality”.

The profession is being impacted by this “great resignation” and the risk to audit quality can not be underestimated. The IRBA is intent on working with the profession to increase the attractiveness of the career, while firms themselves will need to employ retention strategies, looking at benefits, work-life balance, and talent growth strategies.

The IRBA has been at the forefront of the AQIs conversation and was among the first audit regulators in the world to adopt this approach. Increasingly, more international audit regulators have initiated similar projects, recognising the value that AQIs present.

AQIs are a valuable tool for stakeholders in the financial reporting ecosystem, with the AQI report providing greater transparency and insights into the activities of the firms, particularly how audit quality is supported in firms. It is an opportunity for these stakeholders to use visible or quantifiable data, for meaningful and robust discussions about factors that drive audit quality.

Concludes Nagy: “High audit quality is directly related to the integrity of financial markets. It facilitates increased stakeholder confidence in financial statements and enhances the credibility of decision-making. While its importance cannot be understated, audit quality exists within a reporting and governance ecosystem that must also demonstrate exemplary commitment to quality and integrity by all role-players.”

Ends

Notes to Editors:

The 2021 AQI Report can be downloaded here.

More about the AQI Report:

The AQIs discussed in the report are not exhaustive nor are they the only indicators of audit quality that should be considered. However, these AQIs grow in relevance and value, as multi-year data is collected and presented. This report discloses measures around: independence; tenure; internal firm quality review processes; workload of partners and audit managers; span of control; technical resources; training; and staff turnover. These measures are some of the building blocks of high-quality audits and may collectively provide valuable insights into a firm’s system of quality management.

More about the IRBA:

The IRBA is a public protection statutory body established to protect the financial interests of the public by ensuring registered auditors and their firms deliver services of the highest quality. It upholds audit firm independence to ensure that audit quality is such that it enhances the accuracy and credibility of financial performance reporting. In this way, the IRBA has an important role to play in building the reputation of South Africa as an investment market for both local and global investors and driving economic growth for the country.

The IRBA also registers suitably qualified accountants as auditors, who must adhere to the highest ethics standards, and promotes the auditing profession through the effective regulation of assurance conducted in accordance with internationally recognised standards and processes.