IRBA welcomes international boards' drive to focus on professional scepticism

Johannesburg, Sunday, September 10, 2017 - The Independent Regulatory Board for Auditors (IRBA) has welcomed the release of the publication Toward enhanced professional scepticism by the combined Professional Scepticism Working Group of the International Auditing and Assurance Standards Board (IAASB), the International Ethics Standards Board for Accountants (IESBA) and the International Accounting Education Standards Board (IAESB). The South African audit regulator has for some time been concerned about the independence and scepticism of auditors and undertook a two-year project to research independence measures, which led to the announcement of the Mandatory Audit Firm Rotation rule earlier this year.

The Professional Scepticism Working Group was established by the international standard setters in 2015 to strengthen the understanding of, and application of professional scepticism in an audit, as well as to define the role each standard –setting board plays in contributing to enhanced professional scepticism throughout their initiatives.

The report highlights the importance of professional scepticism to the public interest, which it says is underscored by the increasing complexity of business and financial reporting and the fundamental reliance the public places on credible reporting.

Says Bernard Agulhas, CEO of the IRBA: “Similarly, in South Africa, during our work on independence, we have been conscious of the links between weakened professional scepticism and loss of independence. Independence of auditors is absolutely key to audit quality. So if we wish to improve the audit quality, then we must work on professional scepticism in order to strengthen independence. The observations and recommendations of the report are largely aligned to the conclusions we reached in our independence research as it related to weakened professional scepticism and loss of independence.”

In particular, the recommendations urge auditors to be more sceptical of management estimates, as the group believes that the growing use of management’s estimates in recent years has led to deficiencies in reports. Therefore, they say, auditors need to be wary of their own biases and judgments. It further suggests that audit committees can use the new recommendations to measure the effectiveness of their audit teams, and to practice more scepticism themselves in their management oversight roles.

“Professional scepticism is about auditing the time, mind-set, attitude and related questions about how management has scouted the transactions and applied judgements and assessments within disclosures in the financial statements as well,” says Ken Siong, technical director of the IESBA. “It’s very critical [to have professional scepticism] to enable auditors to get to the bottom of issues to make sure they can be confident and evaluate critical issues and whether those issues have been accounted for and presented in financial statements.”

Agulhas adds: “A sceptical attitude also includes asking the right questions when accepting and continuing a client relationship, and exercising healthy professional scepticism when being presented with information from clients. Auditors should also consider that there could be information that is not presented to them and should develop appropriate procedures which will make them aware thereof.”

The paper outlines seven specific themes auditors should keep in mind in applying professional scepticism. These include increased attention to business acumen; environmental factors that can influence the ability to exercise professional scepticism, such as tight deadlines and resource constraints; awareness of personal traits and biases; building in professional scepticism from the outset; regulators' being asked to do more; the fact that aspects of professional scepticism can be relevant to all accountants; and the fact that standard setting alone will not be enough.

“It’s not just about the technical standards but about the mind-set [of the auditor],” Siong says. “Characteristics of the auditors, personal attributes and awareness of biases can help them better apply professional scepticism.”

Siong says that although auditors have been recognising the need for enhanced professional scepticism, there is still a need for others in the financial reporting chain, including audit committees, to take on more responsibility in the area. Audit committees are charged with assessing the quality of the auditors’ work, and in some jurisdictions, are required to report on the effectiveness of the audit. They need a measuring stick to make sure auditors are practicing enough scepticism, he says.

Siong also highlights the importance of both the auditor and the audit committee to work together on guidelines to properly judge management’s estimates.

“There needs to be dialogue between the audit committee members and the auditor about how to go about assessing management judgments and management estimates, to consider the judgment of whether an accounting position or disclosure has been fairly presented,” Siong says. “This will help audit committees really understand in simple terms important factors that come into play [in] helping auditors apply professional scepticism.”

Agulhas says board directors should be more candid with shareholders about the questions they are asking of auditors on professional scepticism — such as how they are auditing complex financial areas. “If investors don’t know what questions are being asked around these areas, there may be an erosion of confidence around the audit.

“These strong, pointed questions around audit matters which require professional scepticism should be clearly communicated to help build confidence in the financial reporting that investors rely on to make important economic decisions. When auditors ask the right questions – which is always easier when the auditor is also independent – then the healthy tension between auditor and client is much more likely to produce reliable audit opinions” concludes Agulhas.

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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.

As an internationally recognised regulator of the auditing profession and other assurance services relevant to the South African environment, it has been recognised by the World Economic Forum as the top independent audit regulator worldwide for seven consecutive years for the strength of its audit controls and standards. 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.