There are some challenges relevant to the auditor and audit professions which are not directly internal to the firms and has no or significantly lower control over them. These challenges are the outdoor challenges which are caused mostly from the side of readers or users of the financial statements, management of the clients, governments and regulatory bodies. These challenges are detailed below:
With the changing business environment, new laws and regulations and the ever increasing occurrence of fraud, auditors are often blamed for not detecting fraud, errors or non-compliance with laws and regulations, responsibilities that originally reside with management. Such misunderstandings not only result in a loss of confidence in the auditing profession, but also often give rise to lawsuits against audit firms, resulting in legal fees and productive management and auditors’ time lost in the litigation processes.
For example, auditors responsibilities is to draw an opinion whether the financial statements provides a true or fair view in compliance with applicable accounting frameworks and regulations. For the purpose of audit, auditors use different sampling techniques and perform audit test to draw an opinion. Whereas, most of the time, readers of the financial statements think that auditors check each and every items and areas of the financial statements and auditors are responsible for ensuring that organization is doing ok. However it is the responsibilities of the management for reporting all aspects of the financial statements and ensuring organization is doing well. This is a classic example of expectation gap in audit.
The audit expectation gap, being a difference in opinion or understanding among the participants in the financial reporting process as to what are management’s duties and responsibilities regarding the financial statements, as opposed to those of the auditor, still exists and poses a very real threat to auditors. It is a very common and one of the oldest challenges of auditing. Expectation gaps is the difference between what auditors do or the responsibilities of auditor and the perception of the users or users of the financial statements regarding what auditors do or that auditors’ responsibilities are.
Client pressure is one of the key challenges in auditing in Bangladesh. Most of the client has strict deadline within which audit report is required to be issued. However, most of the client invites auditors to commence fieldwork just few days earlier than the deadline. Sometime clients appoint the auditors just before the end of financial year. In these cases, auditors have to start field work and wrap up the audit works as soon as possible. Due to the short time, auditors don’t get the chance to make proper audit plan, audit strategy and risk assessment. As auditors has to finish audit works without this, quality of audit works decline. Moreover, auditors can’t thoroughly analyze the financial statements and operation of the organization to identify risk areas. Hence auditor can’t suggest area of improvement in the organization. This ultimately causes retention of problematic areas in the organization which might affect organization’s operation and financial reporting process.
Client is not cooperative
Cooperation of the management of client is very much essential for successful completion of audit. However, this is not the cases. Sometime personnel form client management are not that much cooperative. Management refuses to provide access to all information and documents to the auditors. Furthermore, personnel from client misbehave with the auditors and provides document with much delay. Common problem auditors face when management acknowledges the requisition of auditor and assigns a junior personnel to provide the documents. However, junior personnel are does not want to provide the documents without approval from senior personnel. They revert back to the senior personnel for approval. This bureaucratic behavior hampers audit activates and waste lots of times. This becomes even more challenging when auditors are facing a strict deadline.
Excess feeding of information:
Excess feeding of information means providing more information than required. This is in contrast to the uncooperative behavior of management. In this cases client provide excessive, unnecessary and irrelevant information. This causes auditors to lose track of the audit trail and to be distracted. As a result auditors can’t execute their audit strategy or audit plan.
Misguiding or misrepresenting information
The client’s staff members may collude in fraud that can then be deliberately hidden from the auditor or misrepresent matters to them for the same purpose. Assurance providers rely on the responsible party and its staff to provide correct information, which in some cases may be impossible to verify by other means. If management or any person from client hides any transactions or does not properly disclose to the auditors, it is extremely difficult for the auditors to identify those transactions. From proper presentation and inclusion of all transactions, auditors have to depend on the management of the client.
As mentioned earlier, primary and basic role of auditors is to express and opinion about the fair presentation of the financial statements. However, in recent years, different legislations are imposing additional responsibilities to the auditors. For example, in Bangladesh, auditors of the listed companies have to ensure that all expenses are incurred for the purpose of business. Auditors of bank companies have to ensure that all loan loss provision has been kept properly. Increasingly, legislations are addition different requirement which has become a matter of challenges to the auditors. In case of non-compliance or improper execution of requirement, auditors might be penalized as per those legislations.
Intimidation by management or others
Intimidation is one of the serious challenges of auditing. There are lots of incidents and example that client has tried to intimidate the auditors when client identified any serious issues for getting a clean audit report or suggesting the auditors to skip the identified matter. Intimidation by management can come in various forms. Sometime clients become more hospitable to the auditors and provide gifts to the audit staffs. Sometimes, clients offer audit staffs a position in the management in exchange of skipping an audit observation. There were also evidence that client has intimidated audit staffs by threatening them. Offering bribe or different financial or non-financial facilities are also prevalent as a way of intimidation.
Auditing is expensive:
For smaller companies, hiring a firm to carry out an audit can be costly. Small companies especially the ones at the startup phase perceives audit as an added burden. Again at the time of audit, management needs to provide a space for auditors to work. Management rents the spaces for their own activities but when auditors are allocated particular space, management faces a loss as they can’t use the space. Furthermore, if auditors issue a negative report, client may face different penalty.
Audit is often called a tri-party agreement where shareholders and management has agent-principal relation. Auditors are there to check activities of management on behalf of the shareholders. Auditors are appointed by the shareholders in AGM and auditors reports to the shareholders. However, in reality, auditors are mainly selected and recommended by the management and at the AGM, shareholders approves those appointments recommended by the management. Management negotiates audit fee, time table and other matter with the auditors. Auditors are dependent on the management for the appointment as auditors. However, at the time of audit, auditors review the activities of management. Auditor might not report issues against the management fearing that management might not select the auditors for the next audit.
New legislation, regulations and standards
Following the global trend, Bangladesh Government has also introduced a new legislation to supervise the auditors. Through the Financial Reporting Act, 2015, Government has established a Financial Reporting Council (FRC) to ensure quality of auditing is maintained. Main functions of the council is to issue accounting and auditing standards following the global standards, monitor practicing professional accountants, ensuring quality has been maintained and imposition of penalty in case of non-compliance.
The International Federation of Accountants (IFAC) issued new auditing standards that introduced a risk-based audit methodology and more stringent documentation and reporting requirements. The new regulations, requirements and increased legal exposure of auditors are also often criticized and blamed for harming the auditing profession’s ability to attract and retain staff.
In South Africa, the new Auditing Profession Act was seen to give effect to Government’s intention to ensure that the auditing profession performed its monitoring function and that it could be held accountable for any future corporate bankruptcies. The Auditing Profession Act provided much stricter requirements regulating registered auditors and audit firms and more stringent reporting requirements for reportable irregularities. The Act expanded the practice review requirement of individual registered auditors to that of audit firms, with the result that every registered auditor performing the attest function and every registered audit firm would receive a practice review by Independent Regulatory Board for Auditors (IRBA) at least once every five years. These new requirements were all aimed at improving the quality of audits, but consequently also gave rise to increasing costs for the profession.
The response by governments and regulators to the corporate collapses and perceived audit failures gave rise to various new statutory requirements, regulations and standards that were aimed at strengthening the auditors’ independence and improving the quality of their work. Examples of these are the Sarbanes-Oxley Act in the USA, CLERP 9 in Australia and the Auditing Profession Act, Corporate Laws Amendment Act and Companies Amendment Act in South Africa.
Domination of large firms:
Large firms have their own client network but still focus to increase their revenue by increasing their respective market shares. They provide various services other than audit services. Most of the small firms cannot provide all those services and compete with the large firms. They try to charge lower fees than the large firms to win a client but sometimes large firms cut their fees too low that small firms can’t afford to do so. If however any small firms lower their fees, they have to provide fee by making a loss. This is not sustainable in the long run. This will hamper the overall audit profession as the number of audit firms will decrease.
Study shows that the market for statutory audits of large and very large companies is highly concentrated and dominated by the Big-4 networks. Moreover, the structure of this market is unlikely to change much in the coming years. This is because middle-tier firms face a number of barriers to entry into the market. Such barriers are reputation, capacity and breadth of their networks, and the exposure to unlimited liability in most due to limited professional insurance availability. As a result, over the foreseeable future, middle-tier networks are unlikely to become a major alternative to the large firms especially the Big-4 firm networks.
The challenges facing the auditing profession are enormous, and conventional wisdom would suggest that the only ones capable of tackling them head-on are the large firms, due to their size, the extent of knowledge- and information-sharing implicit in their global network, and the resultant economies of scale.
Increased IT Risks:
Although accounting software are designed to be accurate and help management of organization in keeping records properly, but the management can manipulate the software to misstate or misrepresent the reports. Moreover, unauthorized access to the accounting software can cause breach of confidentiality and loss of valuable information.
With globalization, world has become more digitalized and use of computers have become widespread. Almost all of the companies and other audit clients use computers to maintain accounting and other operating information. With the increase uses of IT, risk of misuse of IT has also increased. In recent times there are lots on incidents of hacking, virus attacks and malfunction of the accounting software.
Auditors have the responsibility to address and indicate all the risks organizations are facing or will face in the near future. For these reasons, auditors have to consider the IT control system and relevant IT risks. In order to do so, Now-a-days auditors has to have IT expertise which is not the core expertise of auditors. As a result organization might face IT risks which are beyond auditors’ knowledge and expertise. But in case of any occurrence, auditors’ activities and authenticity of auditors’ report will be questioned.
N.B.: This post is part of the paper on “Methodology, Benefits and Challenges of Auditing in Bangladesh” written by same author. The Paper was prepared for academic purpose and submitted to Faculty of Business Studies of The University of Dhaka.