By Ian Lavis on behalf of Praxity Global Alliance
Telling an auditor to be more sceptical is like teaching your grandmother to suck eggs, but accounting bodies clearly think scepticism could be better exercised within the profession. The question is how?
Professional scepticism lies at the heart of audit, or so we are told, and yet pressure continues to mount on auditors to exercise greater scepticism in their day to day work.
Seasoned auditors whose instinct is to question numbers could be forgiven for thinking they are being unfairly questioned themselves, especially given the challenge of exercising scepticism while balancing deadlines and budgetary constraints.
And yet it is the auditing and accounting bodies themselves that are leading calls for greater scepticism to be applied – to drive quality throughout the profession as it faces fundamental changes.
The need for more scepticism, says the International Federation of Accountants (IFAC), is underlined by the increasing complexity of business and financial reporting, including the greater use of estimates and management judgement, business model changes due to technological developments, and the fundamental reliance of the public on dependable financial reporting.
Steffen Ahrens, Partner at Praxity participant firm FALK GmbH & Co KG in Germany, welcomes calls for greater scepticism to improve the quality of audit but questions whether auditors can actually be trained to be more sceptical.
“The better the audit becomes the better the quality and the better the result, but our profession is undergoing a lot of regulation and while the call for more professional scepticism is a good cause, it seems it is also a burden. My personal opinion is that professional scepticism is a quality you either have or you don’t have. It is not something you learn. It comes down to whether you are a questioner or a believer. It’s a state of mind.”
The challenge, he says, is to make sure auditors have the tools to be able to do their jobs “efficiently and effectively”, and herein lies the problem. While there is an abundance of guidance encouraging auditors – and indeed accountants – to exercise greater scepticism it is not always clear how to actually do this in practice. “There is not a consensus among professionals as to what is good and what is not good,” Steffen Ahrens adds.
Trust and relationships
Jason Drake, Partner at Praxity participant firm Plante Moran in the USA, says the issue is complicated by the fact auditors and accountants naturally want to trust their clients and develop a good working relationship.
The desire to develop trusting relationships “sometimes conflicts” with providing an appropriate level of scepticism, he says, adding: “We are always going to have an internal struggle between relationships, trust and applying scepticism.”
He points out that auditors are often hired by clients directly, and not by audit committees, and they are hired because of their commitment to quality, a big part of which is exercising scepticism.
Being a better sceptic, he says, is about instilling values from the top down and communicating them effectively. “It’s not just about talking to, and training up, the teams, it’s about making sure they are really digging in and understanding what’s going on.
“It’s the top down approach and showing team members that having a level of scepticism in the audit process is engrained in the entire firm – management, engagement partner, manager and senior staff. People learn from observation, so we need to make sure that we are leading by example.”
The debate over scepticism has been growing since three international standard-setting boards for auditing, accounting ethics and accounting education published guidance in 2017 encouraging accountants and auditors to be more sceptical of management assertions.
Enhancing professional scepticism
The guidance, entitled Toward Enhanced Professional Scepticism, was compiled by a joint working group with representatives from the International Auditing and Assurance Standards Board (IAASB), the International Ethics Standards Board for Accountants (IESBA), and the International Accounting Education Standards Board (IAESB). It sets out actions the global standard-setting boards will take, as well as the role other stakeholders can play, in enhancing professional scepticism.
It includes new guidance to emphasize the importance of understanding facts and circumstances when exercising professional judgement. It also looks to explain how compliance with the fundamental principles supports the exercise of professional scepticism in an audit or other assurance engagements.
Last year, the IESBA produced a follow-up consultation paper, entitled Professional Scepticism – Meeting Public Expectations, to examine the behavioural characteristics involved in scepticism, whether these characteristics should be applied by all professional accountants, and whether the Code for Ethics should be developed to address these behaviours. A series of round tables were held to discuss these issues and the IESBA is currently reviewing options.
How can auditors and accountants be more sceptical?
While accounting bodies have been keen to encourage greater scepticism, a recent report for the Institute of Chartered Accountants in England and Wales (ICAEW) says the focus on guidance is wide of the mark. The ICAEW claims more needs to be done on the question of ‘how’ to actually exercise “good scepticism”.
The report, entitled Scepticism: The Practitioners’ Take, says calling for more scepticism, or more documentation on it, is “neither practical nor desirable” and claims the debate on scepticism to date has been “somewhat superficial”.
“Simply calling for more scepticism, or for more documentation of it, is neither practical nor desirable. Scepticism is a means to an end, not an end in itself. Auditors cannot carry on asking questions ad infinitum, nor should they. Reporting deadlines mean that there comes a point at which it not only seems pointless to ask any more questions (either ‘just in case’ or ‘because we can’), it also becomes impractical,” the ICAEW says.
“The problem of scepticism is one of human behaviour when working to deadlines and budgets.
Importantly, the ICAEW stresses that scepticism isn’t about asking lots of questions, it’s about asking the right questions at the right time.”
The ICAEW interviewed 15 practising auditors, training providers who also perform file reviews, and audit regulators. The findings reveal practitioners believe professional scepticism goes way beyond day to day audit. Key takeaways are:
- Structural changes are needed within firms
Firms increasingly acknowledge that if their plans to exercise scepticism in higher risk areas are to survive contact with the first deadline, structural changes are needed to methodologies, working practices, training, recruitment and retention, to support and encourage scepticism in the field.
- Auditors are not the only people who can or should exercise scepticism
Auditors and audit regulators are challenging other stakeholders in the wider financial reporting supply chain, particularly preparers, to practice what they preach by exercising scepticism themselves. Auditors are also challenging regulators to be more open about ‘what good looks like’.
- Scepticism is about quality, not quantity
Scepticism is about asking the right questions, not simply a lot of them, and about not accepting the first answer. It is also clearly about having the experience to recognise what can go wrong, and the structures in place to ensure that those without that experience – junior audit staff – learn to apply it from those who do.
- Firms should not send out mixed messages
They should not encourage scepticism in the classroom but then discourage it in the field. Everyone involved, particularly junior staff, needs time to develop, exercise and enhance their sense of what might be wrong. For junior staff to learn from their own mistakes, budgets may need to accommodate the pursuit of ‘unprofitable’ lines of enquiry.
- A requirement to seek out contrary evidence will not enhance the exercise of scepticism
Auditing standards and professional ethics require auditors to exercise professional scepticism throughout the audit and in specific areas. The international auditing standard-setter (the IAASB) will consider in more detail whether auditors should be required to seek out contrary or conflicting audit evidence as well as corroborative evidence in the near future. Its preliminary deliberations are aligned with the views of those interviewed: requiring auditors to seek out such evidence does not seem feasible, desirable or necessary within the current framework.
- To be sceptical, auditors need to manage the tension between the demands of independence and the need to understand the business in detail
Specialist knowledge and an intimate knowledge of a business may lead to groupthink, but without them auditors cannot mount an effective challenge to management. Asking ‘stupid’ questions in the absence of such knowledge has value, but it is limited. Auditors need a bank of experience to enable them to react quickly in a changing environment. They also need to be able to step back and consider the bigger picture.
These issues are currently being explored by the ICAEW, together with how auditors identify areas in which more scepticism needs to be applied, and what they should do in such cases.
The ICAEW research indicates there is still a great deal of work to be done to help auditing and accounting professionals work towards exercising greater scepticism in practice, but there are specific areas that firms can focus on to help employees do their jobs more effectively.
It is clear that encouraging and demonstrating greater scepticism is not the sole realm of auditors and audit. It involves, and impacts, all accounting professionals, from juniors to senior personnel, as well as other stakeholders.
The challenge going forward is to establish more consensus in the profession so that audit and accounting personnel are better equipped to exercise greater scepticism and can be confident they are doing the right thing.