Auditors seem to be in the headlines recently for all the wrong reasons. In January 2021, a tribunal report concluded that Deloitte's audit of Autonomy between 2009 and 2011 allowed the company to present a misleading picture in its financial statements. This resulted in the former partners of Deloitte being found guilty of 'serious and serial failures' and 'had failed to act with professional scepticism, which is at the heart of an auditor's role.'
Such reports seem to be cropping up on a very regular basis nowadays. Seemingly, one of the partners had also bowed to client pressure at exactly the point that an audit partner should have resisted. This is a classic intimidation threat and impedes on independence and objectivity, which an auditor must maintain at all times.
In today's economic climate, given the impact of Covid-19, auditors are going to be under pressure to perhaps 'turn a blind eye' to certain things. For example, audit clients may not want to write certain debts off the balance sheet because this may turn a profit into a loss, or present a less healthy picture on the balance sheet. Auditors must stand their ground – especially in a strained economic climate when clients are already under pressure.
Intimidation threats are likely to be more common at the present time as is the potential for a client to manipulate the financial statements to achieve a desired outcome. For example, a client may accelerate revenue recognition to boost revenue and hence profit before tax, including boosting trade receivables. Cut-off's may have been manipulated for expenditure meaning that certain costs that should have been recognised in the current year have been inappropriately deferred into the next year (hence understated liabilities and expenses and overstated profit). These are all issues which must be at the forefront of auditors' minds in a strained economic climate and audit procedures which are responsive to the assessed levels of risk must be applied. One of the main questions an auditor should be asking themselves at all stages during the audit is 'what could have gone wrong in this audit area?' This is how the auditor exercises professional scepticism.
Audit risk (which is the risk that the auditor forms an incorrect opinion on the financial statements) must be reduced to an acceptably low level. Corners cannot be cut by the auditor – even where clients are under severe amounts of pressure to report certain results, because this will impact on audit quality and ultimately risk the auditor having sanctions imposed on them by either their professional body or the FRC. If an auditor 'gives in' to a client and 'overlooks' certain issues within the financial statements, audit risk is increased and will inevitably become apparent during the course of any file review.
Auditors are under a lot of pressure at the present time, not only due to the pandemic and dealing with the disruption that has caused, but also due to revised International Standards on Auditing (such as ISA 540 (Revised) Auditing Accounting Estimates and Related Disclosures) which has to be applied mandatorily for 31 December 2020 year ends onwards. It is therefore important that auditors remember that their role is to be wholly independent of the entity and resist any temptation to bow down to client pressure because doing so will be reckless.
Steve Collings is an author for accountingcpd. To see his courses, click here.