Audit Inspection Reports Are Like “Groundhog Day” Storylines
In the 1993 comedy classic Groundhog Day, weatherman Phil, played by Bill Murray, is covering the emergence of Punxsutawney Phil (and hopefully the groundhog’s shadow), live from Punxsutawney, Penn., an annual ritual that supposedly determines winter’s end. As the film progresses, weatherman Phil gets stranded in the town and wakes up the next morning with the strangest sense of déjà vu — for good reason. During most of the movie, he’s stuck in February 2, 1992, doomed to relive it over and over until he gets it right.
When audit inspection findings are released, this film often springs to mind. Same results, no meaningful change. Investors are left to wonder when improvements will happen.
The International Forum of Independent Audit Regulators (IFIAR) released its 2015 annual inspection findings earlier this month revealing that 43% of inspected audits of listed public interest entities had at least one inspection finding. This compares to 47% in the previous year. Announcing the survey findings, IFIAR Chair Janine van Diggelen said:
“While this is a four percentage point drop in deficient audits over last year, IFIAR is not yet satisfied that enough has been done by the audit profession to understand and address shortfalls in audit quality. The outcomes continue to show a lack of consistency in the execution of high-quality audits and highlight concerns over the robustness of the firms’ internal quality management systems.”
When Will Auditors Change Their Storyline?
Not exactly a strong signal of support for the audit profession. This unsatisfactory performance has led IFIAR and the six largest network firms (BDO International Ltd., Deloitte Tohmatsu Ltd., Ernst & Young Global Ltd., Grant Thornton International Ltd., KPMG International Cooperative, and PricewaterhouseCoopers International Ltd.) to a new initiative to improve audit quality globally. Essentially the goal is a reduction of at least 25% in the next four years in audits with at least one finding and offers a meaningful progress indicator on the longer-term path to improvement in audit quality globally, according to IFIAR. To support this objective, IFIAR is encouraging root-cause analysis, along with intensive quality monitoring, and increased dialogue with the networks’ international leadership.
IFIAR says that the highest number of audit deficiencies were found in the areas of internal control testing, fair-value measurement, risk assessment, and revenue recognition, which they deem as “topics among the core building blocks of audited financial statements.”
Let’s hope the root-cause analysis works and inspection findings are reduced, because continued inspection findings plague the audit profession, which is striving to increase confidence in the quality of its work.
Measurable improvements in audit inspections may finally put an end to winter and the Groundhog Day loop.
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