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Issue 35 | July-September 2016
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INSPECTIONS
AQIs: PromotingMeasurability and Transparency
in the Financial Reporting Value Chain
Continuous improvement in audit quality is a priority for the
Independent Regulatory Board for Auditors (IRBA), and it believes
that audit quality indicators (AQIs) could be a valuable tool to
increase transparency in the financial reporting value chain.
Audit quality is a complex concept and it has proven difficult to
achieve a common accepted definition. This has been made more
difficult over the years as auditing has been under greater scrutiny,
which was triggered by major global corporate failures.
The International Forum of Independent Audit Regulators’ (IFIAR)
Report on the 2015 Survey of Inspection Findings, which was
released in March 2016, stated that 43% of inspected audits of
listed public interest entities contained at least one inspection
finding. The survey is based on a defined list of large global audit
firms.
In response to calls for improved audit quality, specific initiatives are
being implemented worldwide to improve the transparency of the
audit process, with AQIs being one such initiative. The International
Organisation of Securities Commissions (IOSCO), in its report
titled Transparency of Firms that Audit Public Companies, advised
that AQIs be included in audit firm transparency reporting to audit
committees, specifically as related to the audits of public listed
entities.
Locally, the IRBA emphasises the important role AQIs could play
in assisting audit committees and boards in their responsibility to
oversee the quality of an audit. In its comment letter on the Draft
King IV Report on Corporate Governance, the IRBA has also
recommended that audit committees use various AQIs to evaluate
the quality of an audit, together with further recommendations to
strengthen auditor independence, which it believes also contributes
to audit quality.
AQIs have the ability to enhance audit quality oversight by providing
audit committees with an additional tool to assess the external
audit. Therefore, the IRBA supports AQIs as a tool to enhance audit
quality rather than an absolute measure. As part of the financial
reporting value chain, AQIs allow firms to differentiate themselves
based on the quality of the work provided and also enable audit
committees to make more informed decisions.
Without this transparency, audit quality could be compromised in
favour of audit fees. For example, in an audit tender process an
audit committee could end up with scorecards from each of the
tendering audit firms showing exactly the same information, with
the only differentiating factor being the estimated audit fee. Each
firm may have all the minimum qualifying criteria, such as being part
of a global network, having engagement partners with the relevant
experience and having spent some amount of resources on relevant
training. In reality, each firm would approach its systems of quality
control differently.
Some firms may invest heavily in technical resources and training,
whereas others may be more skilled in retaining audit staff and can
ensure, to a greater extent, that the relevant industry experience is
retained. By providing more detail to audit committees in the form
of concise AQIs, the transparency of a firm’s investment in audit
quality is enhanced. Although they are not a complete solution for
audit committees, AQIs have a positive impact as they focus a
committee’s attention on quality as opposed to competitive pricing,
and also raise awareness of audit quality.
Globally, various jurisdictions are at different stages regarding the
use of AQIs in the financial reporting value chain. The UK took a
proactive approach through its Policy and Reputation Group (PRG).
In 2014 the PRG, consisting of representatives from major UK
auditing firms, identified the following five AQI categories through
consultation with various stakeholders:
• External investigations;
• Results of internal and external audit quality monitoring;
• Investments made in the audit practice and in staff;
• Investor liaison; and
• Staff surveys.
Each of the UK’s six largest auditing firms agreed, on a voluntary
basis, to disclose 11 metrics within these five categories in their
annual transparency reports. This type of reporting allows for public
transparency as well as comparability.
In contrast, in the US the Public Company Accounting Oversight
Board (PCAOB) is currently consulting with various stakeholders in
order to refine its list of 28 possible AQIs so as to arrive at what
would be the most meaningful indicators. Its approach is more
flexible as the auditing firms will be able to choose which AQIs are
the most relevant and only report on those.
In Singapore, the Accounting and Corporate Regulatory Authority
(ACRA) published a disclosure framework for AQIs in October 2015.
This framework lists the following eight comparable AQIs that were
developed using observations from the regulator’s inspections
process over the last decade:
• Time spent by senior audit members on the engagement;
• Years of experience and industry specialisation;
• Average training hours and industry specific training;
• Results of external and internal inspections;
• Compliance with independence requirements;
• Headcount in the quality control function;
• Staff per partner/manager ratios; and
• Degree of personnel losses (staff turnover).
The four largest audit firms in Singapore have confirmed their
support to disclose these AQIs to audit committees when the re-
appointment of the auditor is being considered.
A common thread in all the AQI initiatives is that the proposed
primary measures are quantitative and not qualitative. The Centre
for Audit Quality (CAQ), in its 2016 report –
Audit Quality Indicators,