There is more than one gap when it comes to looking at the distance between what many believe a financial audit should achieve and what auditors are actually required to do.

There is the knowledge gap (the difference between what the public thinks auditors do and what they actually do), the performance gap (where auditors fail to do what they are supposed to do) and the evolution gap (where auditing standards have not kept pace with the change in modern business practice and what the public wants auditors to do).

However, this does not mean that efforts should not be made to bridge these gaps. As more questions are raised over how auditors failed to detect fraud or raise any red flags over going concern with companies that subsequently failed, the need to close the expectation gaps becomes increasingly pressing.

Time to evolve

With this in mind, ACCA recently published a follow-up to its 2019 report ‘Closing the expectation gap in audit’. Written in conjunction with CA ANZ, CPA Canada and the Canadian Auditing and Assurance Standards Board, the latest report ‘The way forward on fraud and going concern: a multi-stakeholder approach’ sets out a call to action.

It pulls together the views expressed in a series of virtual roundtable discussions that involved the many stakeholders who represent the financial reporting ecosystem from around the world. It also reviews the various regulatory moves that are currently in motion and suggests a plan of action to ensure effective reform of the auditing ecosystem.

As Maggie McGhee, executive director of strategy and governance at ACCA, said at the launch of the report: “Audit needs to evolve if it is to be trusted and meet demands of public interest. Fraud and going concern were top of the agenda for our roundtable participants, but also gaps around knowledge and the need for everyone in the financial reporting ecosystem to understand each other’s role. It is an interconnected system on which all players rely.”

In the spotlight

The timing of the report is important. In the United Kingdom, for example, the Government is expected to announce imminently its conclusions following a lengthy period of consultation on audit reform. It is a review that not only looks at the market concentration of audit firms but also at the fundamentals of what an audit should be expected to achieve — again with fraud and going concern figuring large in this debate.

However, as one participant in the roundtables says: “We need to make sure what we are changing would actually have made a difference with previous frauds and corporate failures.”

As such, it is clear that it is the expectation gaps that need to be closed, a point made by another roundtable participant, from Canada: “Unless you have been an auditor, people generally don’t understand what auditors do.”

The ACCA report focuses on fraud and going concern for three reasons:

• The public sees audit as part of the solution for preventing corporate failure;

• The public demands more responsibilities for auditors in identifying and reporting fraud; and

• The public believes audit should evolve in a way that prevents corporate failure.

This is backed up by the statistics from a survey of the general public carried out for ACCA’s 2019 report, where 70 per cent of respondents believe that audit should evolve to prevent corporate failure and that 35 per cent want auditors to identify and report any fraud.

A fourth reason, that collaboration is needed between all stakeholders of the profession is backed up by the stakeholder roundtables held this year, which confirm that a ‘holistic’ approach is needed to narrow the expectation gaps.

Action plan

Looking specifically at fraud, the ACCA report makes a number of recommendations. These include:

• the use of forensic specialists in risk assessment should be encouraged, though this should remain in the auditor’s judgment.

• the International Auditing and Assurance Standards Board (IAASB) and national standard setters consider areas where the auditing standards could be enhanced to guide audit practitioners in the application of professional scepticism.

• governments and other relevant local bodies should explore the development of a database of fraud case studies following a root-cause analysis in their respective markets, which could be used as an educational tool for audit practitioners.

• the IAASB should explore ways of improving the auditor’s understanding of their responsibilities when fraud is identified.

• enhancements should be made in the communication channels between auditors and shareholders.

For going concern, the report recommends that:

• the International Accounting Standards Board (IASB) and the IAASB should explore supplementing the current binary approach to disclosing material uncertainty on going concern with additional going concern disclosures;

• the IASB should take into consideration the concerns over inconsistencies over the going concern assessment period; and

• the IASB and IAASB should explore the concepts of resilience and the mechanism for their reporting and/or assurance, as it may help inform the development of more understandable terminology.

However, these recommendations are not without their challenges, as the report recognises. The requirement to use forensic specialists will have cost implications — something that small and medium-sized practices could find prohibitive.

At the same time, expanding the going concern period beyond 12 months could, ironically, inadvertently widen the expectation gap.

But perhaps the key challenge will come in aligning all participants in the financial reporting ecosystem to close the audit expectation gaps. As Charles-Antoine St-Jean, CEO of CPA Canada, says: “Ensuring the long-term resilience of the audit profession cannot be done in isolation. The IASB and IAASB should explore the concepts of resilience and the mechanism for their reporting and/or assurance, as it may help inform the development of more understandable terminology.”