How to solve the audit issue is at the centre of much debate in the wake of several high-profile collapses of large UK companies, with MPs and experts currently scrutinising the actions of PwC and EY as Thomas Cook’s auditors. Joint audit is one option that has been suggested by the Competitions and Markets Authority (CMA), while others want to go as far as breaking up the big four, separating their audit activities from the rest of the businesses.
It was found that there is very little trust in audit among the general public, with just 17% of those questioned saying they trusted the current audit market, according to a study undertaken by mid-tier accountancy firm Mazars.
We are not trusting
The implications of the public losing trust in audit extends further than the audit industry, to society as a whole.
Broadly speaking, as a society we are not trusting. For this reason, we put our faith in audit to ensure rules and regulations are followed. In a variety of ways, we undertake forms of audit every day in our personal and professional lives. We check ratings for restaurants, and we look at reviews for films and plays. We look online to find trusted suppliers of goods and services, or to find software that is right for our businesses.
Through this, products and services are audited by the public in the form of collective feedback, and we place our trust in the likes of review writers and review aggregators to know whether something is worth our time or money.
However, if we lose trust in the reviews, or in this case, in those who provide auditing services, who can we trust?
We put our trust in auditors, in the same way we put our trust in collective feedback, to ensure that large businesses are being run correctly and lawfully. If we were to lose trust in reviews, the system would break down and we would no longer be able to trust the quality of products and services.
With trust being lost in the audit industry, people are not only losing trust in the accountancy firms themselves, but in our ability to trust any business to act correctly and to be held accountable.
As Professor Christopher Humphrey, a Professor of Accounting in the Accounting and Finance division of the Alliance Manchester Business School, explains: “The social impact of audit is quite wide, depending on how you view audit. If you view audit just as the audit of a set of financial statements then it has a certain role and a certain position [in society] and people are often asking questions over the role of the auditors where there’s an expectation gap.
“In overall terms, if you’re looking at the social role of audit, it potentially depends on how trusting the society is. If the society is very trusting, then you don’t need a great monitoring role in the form of an audit because it’s not needed because people trust each other. If you are in a very distrusting society then the role of audit will be more significant.
“That also has a view of audit that it is about checking and monitoring. You might also have a different conception of audit which is about enabling, about facilitating, about building businesses, about enabling businesses to be better and about enabling societies to be better in different forms.
“If you have that view where audit is seen as an education process, as a learning process, as a teaching process, then you would have a different role for the audit.”
Trust that has been lost needs to be regained
In order to truly reform the audit market, the trust that has been lost needs to be regained, and the vision that Professor Humphrey lays out of an audit market that strives for improvement would go a long way towards this.
Should joint audit come into effect, and as the mid-tier firms begin to audit larger companies – such as RSM becoming Sports Direct’s auditor – they have an opportunity to lead the way in changing this culture. But as large businesses continue to collapse, and as the largest firms make every effort to resist change, this trust will continue to slide.
We heard from key figures at the mid-tier firms about their thoughts on this loss of trust in audit. Read the full story here.