Auditing and its future

 

Auditing is a kind of assurance service that is based on a scientific methodology of validating an assertion made by management by a professional- usually a qualified accountant.

 

Auditing was made necessary by the event that warrants separation of ownership from management. This implied that auditors are engaged to solve the question of credibility caused by this separation of ownership from management. But, was this credibility issue solved? May be the next paragraph will get you thinking in the line of so many.

 

Enron, Worldcom, Tyco, Healthsouth, Parmalat- the list goes on- are frauds that were covered for a good number of years before the center could no longer hold. Also, the recent global economic meltdown that was primarily caused by some sharp practices in certain sector of the US economy has re-ignited the almost settled debate caused by the ‘expectation gap’

 

Expectation gap is a tern used to explain the gap between users expectation from audited accounts of quoted companies.

 

Business risk is the risk that a company will fail as a result of not meeting its objective (which many believe to be profit making) over a protracted period.

 

Business stakeholders are constantly faced with the challenge of making financial decision on a regular basis. Information professionals (such as accountants, information systems auditor and regular auditors) help provide filtered information that these stakeholders can easily digest with high confidence.

 

There are four environmental factors that increase users reliance on reliable information from these professionals.

  • Complexity. The ever increasing complexity in today’s business environment has made many business information users to seek reliability of information to be consumed more than anything. Also, it is not all users of information in this present global economy that have the skill required to put data in its final form (information) that an informed economic decision could be based on.
  • Time pressure/ sensitivity. In a time where information spread with the speed of light and quickly become history, the ability of a business to obtain relevant and timely information is a key factor to business success today.
  • Geographical disperse. The advancement in technology has made it possible for those that have interest in a company to be widely dispersed. They will have no choice than to rely on the information provided by an assumed reliable person (information professionals)
  • Results. One thing that is sure as far as investment is concerned is result. It could either be good or bad. This singular reason increased the level of confidence that users of information (especially decision makers) have on reliable information.

 

Now, the question is, what is the future of auditing and accounting as professions?

 

To answer this, a lot of issues need to be clarified. Non-technical users need to be educated on certain things; though that is not to be taken as a hiding place for information professionals (accountants included).

 

To start with, they need to know the main reason why auditing is conducted and also that auditing is quite different from investigation.

 

This will now lead us to the definition of auditing. But, before I do that, I will like to explain two terms that will smoothly usher us into the meaning of auditing.

 

  • Assurance. This is practice of lending credibility to information that would otherwise be incredible.
  • Attestation. This is a kind of assurance that is channeled towards a specific assertion made by management (usually about financial information).

 

Auditing is a systematic method of objectively obtaining, analyzing and evaluating financial statements and its underlying records in order to validate evidence regarding assertions about economic actions and events contained in the financial statements to ascertain the degree of correspondence between the assertions and established standard(s) and communicate the result to the interested users.

 

The above definition points out that; the term auditing is used to describe a situation where the assertions you are attesting for are embedded in financial statements.

 

Note that there is no single place in the definition where it is stated that ‘auditing is done to certify that the subject is 100% perfect and safe for end users consumption’

 

A lot of people have been asking me ‘why then do we spend our time and money auditing financial statements when frauds committed cannot be detected’ My standard answer for them is ‘business leaders should come up with a standard that will give a 100% guarantee that fraud will be completely eliminated and then hold auditors liable for reporting that those standards were followed when they were partially or completely contravened’

 

But answer this before you hit your chest and say ‘yes, it is not our fault as auditors’ whose fault is it? Remember that auditors are professionals and as a professional, you need to prove your worth.

 

You need to go beyond the normal; competence, due care and qualification stuff of a thing. Think a little bit outside the box. Have you thought about becoming a Certified Fraud Examiner? What about taking up a course on criminology? Or attending seminars and workshops on forensic issues (many fields)? Will you hurt yourself if you topple your accounting qualification with CISA?

 

Will you become lesser equipped to be an auditor if you gather all these qualification and experience?

 

In my candid and humble opinion, the future of auditing as a profession will be shaking if accountants and other information professionals do not equip themselves with the necessary fraud fighting tools. Let’s face the fact.

 

It is no longer news that the traditional training as accountants will fully equip you with what auditing and its future will be demanding from you.

4 thoughts on “Auditing and its future”

  1. We need to be cautious if auditors are required to have criminology backgrounds or fraud training. I truely think that aspect needs to be left to a separte group. If this were to happen – than the audit function will lead to criminal investigations and clearly that is not what public companies are looking for. I have some experience in conducting audits and yes, I do agree that we are sometimes held to a higher standard by stakeholders (i.e., discover fraud), but lets be realistic here. It is only a very small percentage of companies that are completely corrupt (from the top down). I know that it only takes one or two of these large companies to bring the economy down (very quickly may I add). One possible solution is for these large (multinations companies) “should” be examined or reviewed by the SEC or some other future (to be created) govenment entity or public entity that will take charge of that task. The audit function should be left intact as it is.

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