Financial audits in accordance with international standards
Present-day quality assurance and control requirements
Even though the globalization of the world economy today undoubtedly acts as a positive factor, it makes the economies of different countries interconnected and mutually dependent. This was amply evident when the world was hit by the first wave of the financial crisis breaking out in fall 2008, from which some countries still cannot fully recover.
The public no longer trusts the system of finance, and most investors are driven to safeguard their capital by taking it back from investment projects, thus causing a downturn in economic activity and an increase in unemployment. As part of efforts to support national economic vitality, governments in some countries are seeking relief in shifting all the burden of the financial crisis onto the manufacturing sector and the general population.
Under conditions such as these, increased performance requirements placed on auditors are as stringent as ever. The public needs accurate and reliable information about the economic performance of the country, a business, an industry sector, etc. At the same time, the public looks to auditors for this information, which leads to a significantly increased level of their professional responsibility.
The Code of Ethics for Professional Accountants states that a distinguishing mark of the accountancy profession is its acceptance of the responsibility to act in the public interest. From an auditor’s perspective, this, first and foremost, implies employers, creditors, governments, investors, as well as the public at large who rely on the work of professional accountants for objectivity and integrity. To honor the trust, the auditor feels bound by a sense of responsibility to the public and the profession. Based on the principles of integrity, objectivity, and competence, an independent auditor’s work used to be held in high regard by the public. However, due to the global financial crisis, the dramatic events unfolding in recent years have repeatedly called into question the reputation of the auditing profession and the public’s trust in it. This situation is accounted for by the fact that, prior to the financial crisis, a variety of financial institutions and businesses had received positive reports from audit service providers, and the public had no reason to doubt their prospects for success in terms of financial viability.
These developments cause audit regulators and professional audit associations to reconsider their approach to the enforcement of audit quality requirements.
Pursuant to the Law of Ukraine on Auditing Activity (as revised and amended in accordance with the law of this title as of Sept. 14, 2006 (no. 140 — V)), the Audit Chamber of Ukraine is designated as the party responsible for the oversight and enforcement of compliance by audit firms and auditors with the provisions set forth in this law, as well as adherence to auditing standards and guidelines, related ethical requirements, regulations designed to safeguard auditors’ independence and ensure compliance with audit quality policies and procedures; interactions between auditors (audit firms) in the process of audit work, and imposition of penalties in case of non-compliance.
Starting from 2003, the International Quality Control, Auditing, Review, Other Assurance, and Related Services Pronouncements have been applied by Ukraine as national auditing standards. Based on the Guidelines for External Audits of Audit Quality Management Systems, every year the Audit Chamber of Ukraine is required to approve the External Audit Plan for inspecting audit service providers for compliance with quality standards. The procedures for maintenance of the register of audit firms and auditors are duly revised to ensure that especially stringent requirements shall apply to the audit firms that conduct audits on key business entities that are of critical importance to the public interest. Specifically, this condition applies to statutory audit requirements to be met by professional service providers and inspected by external auditors for compliance with necessary quality standards.
The policy that defines the national strategy for ensuring compliance with audit quality control standards was developed in accordance with the International Auditing Standards, establishing uniform compliance requirements for audit quality management systems to be used by audit service providers (audit firms and auditors) in Ukraine. The policy states that a service can be considered of high quality, if the service provider has met all regulatory and legislative guidelines applicable to auditing standards, whilst effectively dealing with the needs of clients.
At the same time, practice and experience show that audit quality control standards need further refinement, and this requirement applies not only to Ukraine. Internationally, further efforts are also increasing to strengthen quality control for audit engagements. The European Union is taking steps to create a framework for audit quality control and assurance as well as articulate quality performance guidelines for service provider oversight in the audit industry by both government and public bodies. Much attention is also focused on the standard of performance of audit service providers working with key businesses that are of critical importance to the public interest.
As noted above, the Audit Chamber of Ukraine has provided a general basis for audit quality control. However, at today’s date, there are no methodological or procedural guidelines available and in place that would regulate the process of practical application. Ukraine’s professional associations on the ground have not assumed responsibility for further developing the auditing profession.
Pursuant to the Law of Ukraine on Auditing Activity, the Audit Chamber of Ukraine has general oversight of the quality of audit services, while the role of professional organizations with respect to audit quality assurance is not defined in regulatory guidelines. Thus, audit service providers are in a place where they need to make their own efforts to design and establish audit quality control policies and standards, as well as have them approved in due course, based on their own discretion and understanding.
My personal opinion is that the functions related to external quality control should be delegated to professional industry associations, while letting the ACU continue as an institutional body with oversight responsibilities and powers to ensure compliance by these organizations. Concurrently, a public supervisory body, as well as a Council for Guidelines and Methodology, or an Institute of Audit need to be established. The Council or Institute should engage with practicing auditors, instructors, and members of the academic community for collaborative efforts in this area.
Similarly, the tasks associated with continuous skill development for auditors can also be handed over to professional industry organizations, while establishing control over the process through developing and approving appropriate programs and test control procedures.
The transfer of quality control functions to professional industry associations will enable them to take on responsibility for the future of the auditing profession and improve the public’s trust in auditing.
The European Commission is currently exploring the possibility of significant institutional change in regulatory policies pertaining to audit service providers. All incidental (non-audit) activities, including, first and foremost, consulting and advisory services, are regarded by the European Commission as a potential conflict of interest.
To address this concern, there is a proposal being considered to limit the scope of activity of audit firms to audit services only. It should be noted that incidental (non-audit) services account for a significant portion of total revenues earned by audit service providers. In addition to business consulting, the range of services they provide includes assistance with tax and legal issues, corporate finance consulting, transaction support and IPO preparation, as well as financial investigations.
Constraints affecting the business interests of the biggest audit firms are also expected to be placed on their audit services as well: the largest corporations will be bound by law to engage two auditors to jointly review their reporting procedures. Additionally, at least one of these two auditors will have to work for a firm other than the Big Four (Deloitte, KPMG, PricewaterhouseCoopers, and Ernst & Young).
In addition, time limits are placed on the length of business relationships existing between auditors and auditees. Thus, it would be against regulations to be involved in audit engagements for a large company for more than nine consecutive years. Mandatory auditor rotation policies would be adopted.
Such constraints are obviously intended to stabilize the financial sector and regain public trust in financial reporting shaken by the crisis.
CEO at AUDIT-VID (PhD in Economics)
Audit-Vid, firm of auditors based in Zaporozhye, Ukraine
Provider of all types of audit, accounting, and legal services
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