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CPA123208 07/2013
Tackling Todays Audit Challenges
Introduction
ACRAs inspections of audit engagements in recent years
have noted a number of recurring deficiencies. These appear
to be preventable had there been an emphasis on getting
things right from the start, such as through more timely
partner involvement in engagement supervision and review,
appropriate training for staff before starting engagements, and
effective internal quality reviews.
While the regulator has identified some impediments to
audit quality, it is important to hear the views of small and
medium-size accounting practices (SMPs). To this end, ACRA
engaged CPA Australia to conduct a focus group discussion
on understanding Todays Audit Challenges and what can be
done to help SMPs tackle them.
The focus group, conducted on 11 July 2013, comprised
11 practising accountants, who are partners of SMPs and
members of CPA Australia. Each partner has at least 15 years
of practising experience and holds a leadership position in the
firm. This report summarises the key issues discussed.
Understanding the challenges
Clients and mindsets
A big part of day-to-day challenges involves clients, which are
usually small and medium-size enterprises (SMEs). The focus
group felt there was currently a wide gap in expectations
between clients and auditors, making it more difficult for
auditors to perform their roles. The root of the issue involves
deep-seated mindsets that have perpetuated over the years
to the extent that there is a pre-set notion of what auditors
should be doing.
As one participant puts it, Whether big or small SMEs, they
think as long as you have paid an audit fee, the auditor should
do everything, including drafting the financial reports or fixing
any entries that are wrong. There is an attitude of I dont
care, I dont need to know the accounting standards, only the
auditor needs to know.
Competence
Participants felt SME management and boards lacked
knowledge of financial statements and competence in
challenging the assumptions used to prepare accounts. One
participant recounted an experience after being appointed
by a client. We had just taken over a job. Before we
commenced the audit, we looked at their accounting records
and discovered that they used cash accounting! This means
GST reporting, the whole audited report of the past year and
the corporate tax may all be wrong, said this participant.
While management and directors may not be trained
accountants, the group felt that some basic knowledge of
financial statements was a vital part of directors duties. These
include the assumptions used in impairment assessment and
the discounted cash flow method for assessing impairment
Whether big or small SMEs,
they think as long as you have
paid an audit fee, the auditor
should do everything There
is an attitude of I dont care,
I dont need to know the
accounting standards, only the
auditor needs to know.
Focus group participant
of subsidiaries or goodwill. Sometimes the discount rate is
plucked from the air. Plus, the computation of the weighted
average cost of capital has got assumptions behind it.
Theres no right or wrong answer. Its really an estimate that
management puts up that we feel is reasonable. It boils down
to competence, said one participant.
A lot of handholding of the client is therefore required, which
strains the resources of practitioners in servicing the client
and achieving a good quality audit. Some participants felt
the fundamental challenge lies with the preparers of financial
statements. If the preparer doesnt appreciate that a good
set of financial statements is important, then you can never
drive up the audit standards, said one participant.
Another unhealthy mindset is that many SME clients tend
to go for the cheapest alternative for preparation and ignore
quality. They will try all ways to cut costs and may not get
the quality or qualified accountant. That gives rise to pressure
on the auditors, the fees and recovery rates. You cannot be
doing the work and yet audit at the same time, observed one
participant.
But this practice may be difficult to fix as it has been
entrenched for years. One participant said, In the good old
days, we prepared everything for the clients, even the audit
schedules. So it became a market practice. Now, if you
want to separate what is audit and what is not audit, its very
difficult.
Practitioners
The group felt that while many practitioners are doing things
right, there are also black sheep that could potentially bring
disrepute to the profession. Some of these practitioners
refuse to upgrade or keep up with auditing standards that
have changed significantly over the past decade.
Many people still think that auditing standards are back in
the old days, principles based, etc. For people who have
not caught up with changes in standards, it may be more
advisable for them to re-divert their resources to concentrate
on providing other public accounting services instead, said
one participant who recounted a personal experience from
speaking to partners who are in their late 70s.
If the preparer doesnt One option is to require all directors to attend programmes
that provide basic understanding of accounting and their
appreciate that a good set fiduciary duties as directors. Currently, these are only required
for directors of listed companies.
of financial statements is
important, then you can never ACRA, being the registry of companies, should play a role of
drive up the audit standards.
Focus group participant
educating SMEs, whether through the Association of Small
and Medium-size Enterprises (ASME) or the various chambers
of commerce. Its good to require all directors to go through a
short course, said one participant.
The group said another challenge is that some practitioners
Another suggestion was for directors to be subject to continuing
spoil the market. They do everything for their clients,
professional development, just as qualified accountants are.
including preparation of accounts. Others sign off far too
many audits than their resources and ability to devote
Importantly, participants also felt that mindsets among SMEs
sufficient time and attention would allow.
must change on the quality of accounts preparation and
audit. While SMEs may be cost-conscious, they should
A challenge that is not likely to go away is the practice of
be educated that for financial reporting, low cost does
undercutting fees. The group felt that new partners, who have
not equate to value. They have to get out of the cheaper
revenue targets to meet, may not follow market best practice
is better mode. It is best to encourage directors and
and would be willing to take on jobs for much lower fees. This
management to appreciate that they have a part to play in
has ramifications for SMPs, which traditionally cannot clinch
ensuring that reporting is not just an auditors problem but
high-fee jobs. This exacerbates the vicious cycle where lower
their responsibility as well, said a participant.
fees will crimp the ability of SMPs to pay better salaries and
hire and retain good people, said one participant.
To ensure that accounts are properly prepared, participants
felt that companies should either hire qualified accountants
All participants, without exception, said a big challenge
or outsource the preparation work to professionals. This way,
for SMPs is talent attraction and retention. We do not get
there is greater comfort that accounts are being prepared
the cream of the crop, not local graduates or Australian
correctly for audit.
graduates. The Big 4 will almost take them all. We get
the diplomas and we need to train them in-house. Its
The regulators hand may also be important because
a challenge, said one participant. The group felt this is
education by practitioners thus far has produced very limited
primarily because SMPs dont have the reputation and draw
results. One participant said, We probably need to come
of the larger firms. Even if graduates were to join the SMPs,
from a different angle. Not just practitioners to the client but
participants said that it was generally difficult to retain them
also from authorities to the client because we have done this
beyond 1-2 years as young professionals are mobile.
for so many years and we are still facing these issues and
challenges.
SMPs are also grappling with a shrinking pool of available

For
accountants. There arent enough Singaporean accountants
to begin with, said one participant. This has been aggravated people who have not
by shrinking foreign worker ratios implemented at the national
level. Its not that we want to bring in foreign talent, its just
caught up with changes
that there is no local supply, went a common refrain. in standards, it may be more
advisable for them to re-divert
Lack of branding is also limiting SMPs ability to attract young
talent. One participant noted, I got interns who say they their resources to concentrate
want to work for smaller firms because they learn more and on providing other public
see the whole process faster. But when we chat with them,
we realise they are all aiming for the Big 4 or the commercial
world after they graduate. They tell you straightaway, I
accounting services instead.
Focus group participant

am joining the Big 4. One participant felt that appropriate
branding and profile of SMPs might improve the situation, Competencies Practitioners
although this would require sustained resources. Practitioners should do their part to raise competencies
for themselves and their staff, such as investing in a quality
control process. Closer supervision of staff is also critical.
Helping hands When performing an audit, if your staff says there are no
exceptions noted, do you actually check the staffs work? Do
Competencies Clients you challenge to see if the work is done correctly? said a
Participants said much work needs to be done to better participant.
communicate changes in standards to boards and
management and raise their competency in financial A few participants suggested that ACRAs Practice Monitoring
reporting. The priority is to educate preparers to get the Programme be used more extensively to raise standards
accounts right. This will cut down on the work during the among practitioners, such that they know they cannot just fill
audit, said one participant. up a form or a simple worksheet when auditing their clients.
A lot of practitioners have to break their habits. One is
seeking consultation, seeking help, when that is needed.
Another is the way they review files, the way they run their
business, the way they work and interact with staff. All these
have changed. If you still dont want to change, you cant
survive, said one participant.
To free up auditors to focus on audit, it was suggested
that non-practising chartered accountants could provide
public accounting services, excluding audit. These could be
supervised by their professional bodies, which could help
by branding the services so that they can command a fee
premium in the market.
Participants also suggested that practitioners could work with
their professional bodies to provide continuing professional
development programmes to keep staff updated on changing
standards and other technical knowledge.
As for staffing, the group felt that professional bodies could
link potential sources of talent with practitioners. Professional
bodies may also help to profile SMPs key competencies
to increase their value proposition to attract and retain
talent. Through such collaboration, there is also the added
advantage that more synergies can be derived and improve
productivity for SMPs.
The priority is to educate
preparers to get the accounts
right. This will cut down on
the work during the audit.
Focus group participant
Changing mindsets
While there are many resources available for SMPs and their
clients, the group felt that mindsets would be the hardest to
change. Much needs to be done to narrow the expectations
gap between the two sides. The challenge is for both
clients and professionals to work hand in hand. That has not
materialised. So we will need initiatives or certain programmes
for the different stakeholders to come together and see eye to
eye, said one participant.
One priority is for practitioners to have the will to push back
when fees become untenable. According to a participant,
Clients still think they can get someone cheaper next door.
This is where the profession can work together. So, if you
knock on the door next door, the price is higher than what
your existing professional will give you. Its open competition
but the client still has the mindset that whoever quotes a fee,
he can find somebody cheaper.
On the directors end, a suggestion is to sanction directors
for not getting professional help in accounts preparation.
When you find a director who is not compliant, one of the
sanctions for the directors is to hire a qualified accountant.
Slowly the market will change. For directors, before they get
into trouble, they will arrange to get a qualified accountant,
suggested one participant. This may well mean instituting a
whistle-blowing regime, where transgressions can be flagged
for scrutiny.
A more controversial proposal by the group is to sanction
accountants who are found to be negligent in their work.
Doctors and lawyers get public sanctions, why not
accountants? If the partner did something wrong, such as
signing off 250 sets of accounts without audits found, he
should be publicly sanctioned, said one participant.
A mindset change is also needed on the perception of high
volume, low fee work. One participant said partners with high
numbers of clients do not necessarily mean their quality of
work is low. Instead, a better way is to assess SMPs clients
on whether they belong to the low-risk or high-risk categories.
Depending on the portfolio of clients you are managing,
some are probably lower risk compared to the larger clients. If
you are providing compilation services, rather than audit, then
the risks are very different. Public accountants should also be
compared against firms of similar sizes, said one participant.
Conclusion
Tackling todays increasing complex audit challenges will need
the combined efforts of everyone in the financial reporting
eco-system management, boards, accountants, auditors,
professional bodies and regulators.
Accountants and auditors will be key players in the quest for
better quality preparation and audit of financial statements.
The focus group felt that narrowing the expectations gap
between clients and auditors will be a key priority, as is
changing the mindsets of management and directors that the
cheapest alternative may not be in the best interest of their
firms.
For practitioners, their priority is to upgrade their
competencies and keep up with constantly evolving
auditing standards. This will help them make more valuable
contributions to the financial reporting chain and uplift the
accounting profession.
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