auditor scepticism. martyn jones 17 september 2010

Auditor Scepticism.

Martyn Jones

17 September 2010

Key points

• Current hot topic

• The opportunity for debate is welcome

• Much is already happening to improve the application of auditor scepticism

• There are some ‘red herrings’

• But there is scope for more than can be done

2© 2010 Deloitte LLP. All rights reserved.

Significance of scepticism

Paramount importance to auditors

Essentially a behavioural issue

Strong connection with need for

good ethics

Also connected with need to

find fraud


Important to investor confidence

Symptoms of unethical behaviour


Overly dominant management

Someone who talks too much and who always wants to know where you have got to on the audit

Extravagant lifestyle and behavioural change

Excessive gambling

My wife has a private income or we have won the lottery or something similar

Never takes holidays or records in a mess

Starts early and finishes late

Insomnia

Doesn’t allow others to do their work

Someone who avoid meetings us or stops us gaining access ourselves

An attempt to “bribe” you

Symptoms of unethical behaviour


Inconsistencies Backdating Involvement of related parties

Destruction of documents

Business not conducted on normal terms

Override of normal

procedures by senior

management

Photocopied documents

Entries with no or thin

documentary support

Large or unusual entries

near period ends

Business model does not make

sense

Symptoms of lying


Nervousness (fidgeting, scratching, itching or sweating)

Voice changes (higher pitch,

pausing or stuttering)

Eye signs (avoiding eye contact and

looking up and to the right)

Posture (not able to stand still,

tight posture or hands turned

down)

Illogicalities and strange excuses

Talking quickly

Hands on face particularly over

the mouth

Overstated friendliness

Auditor scepticism is now high on the agenda

Aftermath of the global liquidity meltdown

Impact of austerity on public sector

Need to increase trust in business

Continued economic difficulties


EC Green Paper on Lessons from the Crisis



AIU public reports: comparison with other firms



Audit of client money

Repo 105Loan

provisionsGoing concern

APB suggestions for debate


Presumptive doubt instead of enquiring

mind

Non acceptance of

client schedules

Auditors afraid to bill

clients for cost overruns

Changes to Ethical Standards (e.g. Restricting

provision of non-audit services)

EC suggestions for debate


More comfort on financial

health of companies

More dialogue with internal auditors and

the audit committee

More and earlier reporting to stakeholders

Making ISAs legally binding

Appointment by third party

Maximum length for audit

firm’s engagement

Prohibition on non audit services

Maximum fee level from single

client

EC suggestions for debate


Mandate rotation of firms

Joint audits including non systemic firms

Pan European supervision

Balance sheet substantive testing

only

Changes in structure of market

Pan Europe passport

So what’s the evidence?


Academic Research

Source: Beattie, Vivien, Fearnley, Stella and Hines, Tony “Auditor/company interactions in the 2007 UK Regulatory Environment”, April 2008



Source: The Deloitte CFO Survey: 2010 Q2 results



Source: The Deloitte CFO Survey 2010 Q3 results

Is there an alternative to presumptive doubt?


Enquiring Mind

Clarified ISAs

•new standards already released• not apply until periods ending on or after 15 December 2010 No opportunity for their effectiveness to be tested

+Other regulatory

measures

•Companies Act auditor offence•Ethical Standards•Audit Firm Governance Codes•AIU inspections•FRRP referrals•Audit Firm Transparency reports

Some key revisions in the Clarified ISAs


More work required if anomalies identified

More fraud and risk-based ISA on related parties

Tougher stance on management representations

Management override is a significant risk

Tough new standard on confirmations

Much tougher ISA on groups

Some key revisions in the Clarified ISAs


Objective based approach to ISAs

Audit of accounting estimates

Investigate conflicting

explanations

Communicate significant

deficiencies in internal control and significant

difficulties

Document rationale for

significant professional judgements

Some things we do to assist scepticism


Involvement of forensic

specialistsData analytics

Sharing of ideas by financial institutional specialists

Monthly training session

Accelerate work on significant

risks and disclosures

Identify sub-population of audit interest

and focus testing on these sub-populations

Some thing we do to assist scepticism


Professional standards review Whistleblowing facility

Independent Review Partners

Encouraging our more senior people to

mentor on scepticism



Electronic processes for checking audit file

completenessConsultation culture

Industry support Additional specialist and quality reviewers



Regulation Assurance Reviewers

Partner rotationTough

independence processes

Variety of work for our people

However more can be done


Guidance for directors and auditors on

impairment

Avoidance of yet more box ticking

requirements

Guidance on understanding the business model –

barely mentioned in ISAs and Practice notes



Support for the IASB in its work on changing

current accounting for losses incurred to losses

expected

Debate a more meaningful role for

auditors on narrative reporting

Targeted and focused assurance reporting



Increased communication between regulators and auditors

Targeted and focussed assistance engagements

Some other views


Qui Chen, Khim Kelly and Steven SalterioChanging the nature of the evidence collected and more critical questioning helps but merely extending the extent of the sample does not

Karen A Van PeursemNeed to draw on the understandings of ancient sceptics to understand why audits failed

Geoffrey George and Francis MaloneNeed for a forensic phase in all audits

Treasury Select CommitteeLittle evidence to suggest that auditors failed in their duties in the run up to the financial crisis

Public Company Accounting Oversight BoardThe firm have frequently strayed from the PCAOB’s standards in issues related to revenue management's accounting estimates, fair value measurements and materiality thresholds

Some red herrings


Mandatory joint audits Independent appointments board

Further outright prohibition on non audit services Mandatory firm rotation

Limit on Big 4 FTSE audit appointments

Some other red herrings


Earlier reporting to stakeholders Pan European supervision

Balance sheet substantive testing only with reliance on internal auditor for controls

work

More rules-based approach

There needs to be sufficient scope for properly documented professional judgements

Relevance to business schools and accounting departments


Further research Development of skills

Possible skills to develop further may include mentoring, communication, more sceptical behaviour, critical questioning, challenging business models

and analytical procedures

Suggested next steps


Increased focus on implementation of the

clarified standards

More focus on behaviour and on

communication issues

Bibliography


Clarified International Standards on Auditing (UK and Ireland) http://www.frc.org.uk/apb/publications/clarified.cfm?cat=68

Fraud and Audit: choices for societyhttp://www.frc.org.uk/images/uploaded/documents/Fraud%20and%20Audit%20-%20Choices%20for%20Society%20_final_1.pdf

Audit of banks: lessons from the crisis http://www.icaew.com/index.cfm/route/172480/icaew_ga/Technical_and_Business_Topics/Thought_leadership/Inspiring_confidence_in_financial_services/Audit_of_banks_lessons_from_the_crisis/pdf

Discussion Paper 'Auditor Scepticism: Raising the Bar‘http://www.frc.org.uk/images/uploaded/documents/Discussion%20paper%20Auditor%20Scepticism%20-%20raising%20the%20bar21.pdf

Banking crisis: regulation and supervision: Responses from the Government and Financial Services Authority to the Committee's Fourteenth Report of Session 2008-09http://www.publications.parliament.uk/pa/cm200910/cmselect/cmtreasy/47/47.pdf

Do Audit Actions Consistent with Increased Auditor Scepticism Deter Potential Management Malfeasance? , Qui Chen, Khim Kelly and Steven Salterio, 2009http://aaahq.org/meetings/AUD2010/AuditActionsConsistentWithIncreasedAuditorScepticism.pdf

Dairy containers’ New Zealand Audits 1981-1989 Pyrrhic Victory for the Ancient Sceptic, Karen A Van Peursemhttp://www.victoria.ac.nz/sacl/6ahic/Publications/6AHIC-33_FINAL_Paper.pdf

Auditors and corporate failure: an analysis of the AWA and HIH failures in Australia and the Role of the Auditors, Geoffrey George and Francis Malanehttp://reference.kfupm.edu.sa/content/a/u/auditors_and_corporate_failure__an_analy_86455.pdf

EC Green Paper - Consultation on audit policy - Lessons from the Crisishttp://ec.europa.eu/internal_market/consultations/docs/2010/audit/green_paper_audit_en.pdf

http://www.frc.org.uk/apb/publications/clarified.cfm?cat=68

http://www.frc.org.uk/images/uploaded/documents/Fraud%20and%20Audit%20-%20Choices%20for%20Society%20_final_1.pdf

Biographical details


Martyn Jones

•BSc Hons, FCA, FRSA•Trained with Robson Rhodes and Deloitte Haskins & Sells and qualified with ICAEW in 1976•Lecturer then Head of Centre, Accountancy Tuition Centre 1977-1981•Under-Secretary then Secretary UK and Ireland Auditing Practices Committee 1981-1984•UK and Irish Technical Adviser to International Auditing Practices Committee 1983-1984•National Audit Technical Partner, Deloitte UK 1987-•Member DTTL global Audit Technical Advisory Board•Chairman Deloitte Corporate Governance Services Group and of Quality Group on Sustainability and Carbon Reporting•Chairman Consultative Committee of Accountancy Bodies Ethics Standards Group•Chairman International Standards on Auditing Implementation Sub-Group•Chairman Advisory Group for International Standards on Auditing methodology, software and training providers and of Stakeholder Panel on stewardship assurance reporting•Chairman Institute of Chartered Accountants in England and Wales (ICAEW) Ethics Standards Committee and Deputy-Chairman of ICAS Working Group on non-audit services•Member ICAEW Technical Strategy Board and of its Council•Member Audit Quality Forum•Member Confederation of British Industry’s Companies Committee•Member Auditing Practices Board’s working group on going concern issues during the current economic conditions and of its International Committee•Member Policy and Regulatory Group (Big 4 + 2)•Member Swansea University School of Business and Economics Advisory Board 2009-

Member ofDeloitte Touche Tohmatsu

auditor scepticism. martyn jones 17 september 2010

Documents

deloitte llp

concern slide

sense slide

investor confidence

audit committee

audit extravagant lifestyle

audit of client money

internal auditors