Differentiating audit quality in accounting

Accountancy firms need to find ways to differentiate themselves. Remaining competitive is all about showing how your firm can deliver a better quality service from the next.

In a world dominated by the Big Four, or even six, accountancy firms, it’s hard for the smaller players to get noticed. This is where quality differentiation is key, as new findings from theInternational Forum of Independent Audit Regulators (IFIAR) highlights.

Looking mainly at the largest six providers in the market - BDO International, Deloitte Touche Tohmatsu, Ernst & Young Global, Grant Thornton International, KPMG International Cooperative, and PricewaterhouseCoopers International - the report found several deficiencies in audits.

For publicly-listed companies, the biggest failings related to auditing fair value measurements; internal control testing; and procedures to assess the adequacy of financial statement presentation and disclosures.

It also identified deficiencies relating to financial institutions in the auditing of allowance for loan losses and impairments; internal control testing; and auditing of the valuation of investments and securities.

“The high rate and severity of inspection deficiencies in critical aspects of the audit, and at some of the world’s largest and systemically important financial institutions, is a wake-up call to firms and regulators alike: More must be done to improve the reliability of audit work performed globally on behalf of investors,” said IFIAR chair Lewis H Ferguson, who is also a member of the US Public Company Accounting Oversight Board.

What the report highlights is that firms outside the biggest networks can mark themselves out by focusing on audit quality. Smaller firms shouldn’t rest on their laurels, however, as at least some of these deficiencies are likely to extend beyond those firms surveyed. The key is to learn the lessons of this report and improve audit quality.

Firms should “develop robust root-cause analysis to gain a clearer understanding of the factors that underlie inspection findings and to take appropriate remedial actions”, says IFIAR vice chair Janine van Diggelen, who is also the head of the Audit & Reporting Quality Division at the Netherlands Authority for the Financial Markets.

“Only with a thorough understanding of the underlying factors that have led to findings can audit firms take appropriate measures. These measures should be aimed at improving their auditing techniques, as well as their oversight policies and procedures, but also consider the cultural and behavioral influences in the firms that were relevant to the deficiencies.”