How do we improve audit quality after record high audit watchdog fines?

By Steve Cox, IRIS Chief Evangelist

Did you see how much The Financial Reporting Council issued in fines for the last year?

The answer, a staggering £43m, it revealed earlier this month. Audit firms, auditors and accountants were hit with this record high total for 2018/19, which rose from £15m the previous year.

FRC Executive Counsel Elizabeth Barrett said the sanctions, “send a clear message that where behaviour falls short of what is required, we will hold those responsible to account.”

Surely time for audit professionals to take stock and consider making changes? But what can they can do to improve standards and stamp out some of the errors that have led to these gigantic fines?

I think it’s fair to say that auditing has become an increasingly onerous task. There are so many potential hidden and costly errors lurking in each audit, while an explosion of data appears to double every 18 months, with clients using multiple ERP systems across various locations around the country. Practices are also under pressure to deliver audits at lower costs, requiring less effort and staff to provide a higher level of assurance.

So, what is the answer to the challenges above and, ultimately, to improving auditing and tackling the issues that led the FRC to hand out these penalties?

Technology holds the key. More specifically, artificial intelligence, which is growing increasingly sophisticated.

There’s no doubt that the quality of audits can be improved with AI, thanks to work being carried out quicker, more accurately and in higher volumes than a person is capable of. That’s not to mention the new types of insights and understanding it can offer – hence why we are hearing about major investment in AI from the big four. They recognise not only its current potential and value but also how it’s only going to get more important in coming years.

Elizabeth Barrett stressed the “critical importance” of “clarity and accuracy of financial reporting” in her remarks about the sanctions.

We understand accuracy is vital and this is where IRIS AI is so powerful. It uncovers commonly made human errors and reviews 100% of transactions in minutes, producing rich, statistically sound results in minutes. It also provides ratings to flag up the most severe risks it has found. These capabilities represent a step change in how auditors work and ultimately should help prevent audit firms from falling foul of the regulators in future.

Talking of the future, the FRC is soon being axed and replaced by The Audit, Reporting and Governance Authority (ARGA), but it’s clear this review is not simply a farewell note, but actually a starting point for the new body’s approach to enforcement. Indeed, FRC officials said it was “a baseline for measuring future enforcement performance” when the transition takes place.

It’s clear from Ms Barrett’s words there will no let up in the approach from the new regulator. She warned of ‘severe’ consequences for those who fail to improve behaviour and identify, address and report where failures occur. Auditors, take note.

Discover more about how IRIS AI can help improve your auditing here. Want to learn more? One of our experts will be happy to talk to you. Call us on 0344 815 5550