Do we trust our trusted intermediaries?

As we enter a citizen-powered age, we are increasingly debating the role of our trusted intermediaries – the professions – in a society where there are a growing number of more empowered investors, stakeholders and citizens

About 50 years ago, the great Harvard sociologist Talcott Parsons wrote that the professions have “become the most important single component in the structure of modern societies”. Is their role becoming more important in a century of increased complexity in which individuals are rendered less powerful? Or, on the contrary, is their role fading away, eroded by scandals and challenged by the phenomenon of new network societies?

Traditionally, there has been a massive asymmetry of information between the knowledge that specialists and the public have. This is now melting away. We can see this even in the medical profession where greater access to information has made patients more aware. So, on the broader level, the question is how do professions modernise themselves to adapt to these new realities?

What we aim to discuss with our AuditFutures initiative is how the realities of the information age are affecting the role of professions in general and auditing in particular. Within this framework, how do we calibrate what the public interest is? What does good look like?

These are the questions that we would like to address in our partnership with the Royal Society of the Arts, UK’s leading think-tank for social progress. The RSA’s mission rests on the notion of professionals, managers, entrepreneurs and others seeing the value of working together for the wider public good. The RSA started as a coffee house for intellectual debate and we want to bring the best of contemporary thinking to the audit profession.

We aim to engage important stakeholders from the accounting firms, academia and civil society in a positive debate about the evolving role of audit. Our challenging project aims to redefine the role of the audit profession within the context of today’s public interest and to formulate a vision for the highest aspirations we can have for audit in the 21st century.

As part of this project – which will lead to a discussion paper later this year – we want to invite you to contribute your views. You may be within the audit profession, have experienced how it operates in the private or public sector, or have strong views about how the professions need to evolve in the service of society.

We have focused on the following areas and we would like your input regarding these questions:

  • How do you think businesses and the public perceive the audit profession? What should the highest aspiration for the profession’s role be in serving society?
  • How can the audit profession develop the characteristics of a modern profession that enjoys public trust? Are there any professions whose journey is instructive?
  • Where can the audit profession add value in a public service landscape that is increasingly shaped by global challenges, social innovation and information complexity? What are the areas in which we need trust and assurance?

You can post your comments here or send your responses via email. (All responses will be held in confidence and explicit permission will be sought before any are quoted in the project’s report).

  • Mark Lee

    In 1982 shortly after qualifying as an ACA I was invited to speak at a recruitment event. I was to explain why I had chosen to move into tax (at Touche Ross) and the opportunities that I saw ahead. I still recall the opening line of that talk. It was: “I hate auditing”.

    I stayed in practice in tax for almost 25 years, during which time I was quite successful in my career – including being elected as Chairman of the ICAEW Tax Faculty ten years ago. I never went back to audit. But the skills I developed during my formative skills have stayed with me and have been very useful at different stages of my career. I have no desire to return to the audit profession but I have an ongoing willingness to help my Institute – whilst continuing to build my portfolio career.

    I was intrigued to see the 3 questions in this blog post last week. I’m not sure how they came to my attention. But I copied them down and over the last few days I have drafted replies based on my knowledge and experience. Why I have spent so long on this I don’t know. Still I hope my thoughts are of some interest:

    >>>How do you think businesses and the public perceive the audit profession?

    Those business leaders who endure an annual audit understand what it is, the benefits of such and the downsides.

    However, few SMEs are subject to an audit so only a tiny proportion of business owners have endured an annual audit. This fact alone comes as a surprise to most people.

    There is widespread confusion as to which businesses are audited and which are not.

    All of this impacts views of the audit profession. Many people still assume that all accountants are auditors, even though the degree of overlap is lower now than ever before. All auditors are accountants but most accountants are NOT auditors.

    The media, helped by ill-informed assertions by PAC, routinely imply that the term ‘auditors ‘ is synonymous with big bad firms of accountants who allegedly consistently fail to spot corporate fraud. ‘Auditors’ are also castigated for allowing, and sometimes, encouraging large corporates to pay less than their ‘fair share’ of tax. This all feeds what is now a common, but inaccurate and unfair perception of the audit profession. To the extent that the tax experts in big 4 firms have promoted tax avoidance schemes the criticism they face is a consequence of their own making. But few auditors have ever provided such advice.

    On the other hand though it certainly used to be the case that many audit partners would talk up the opportunities for clients to take advantage of available tax schemes – often despite the reservations if their in-house tax experts. Audit partners heard about the tax savings others were securing and wanted their clients to benefit too. Just like small businessman who wanted his or her share of the tax savings. It often required a very string willed in-house tax partner to discourage this enthusiasm for taking part in risky tax schemes. Such reservations would now be recognised as informed foresight.

    This is all relevant to the debate because many audit partners in all sizes of firms have long wanted to be seen as more mainstream business advisers. Some have the experience and knowledge for this. Others do not. They frequently want to be of more value to clients than their role as an auditor permits them to be.

    As the audit exemption threshold has increased so there are now far more qualified accountants who are not registered auditors than was the case in the 1970s or 1980s. A new generation is emerging who have never done any more auditing than was absolutely required to qualify as an ACA.

    >>>What should the highest aspiration for the profession’s role be in serving society?

    The concept of independent auditors demands that audit firms provide no other (non-audit) services. Does anyone other than the auditors themselves really think it makes sense to argue otherwise?

    The problem is that this would require a huge shakeup among the largest professional service firms. And there is no guarantee that so many graduates would be attracted to the idea of working for a pure audit practice.

    The good news is that the historic resistance at grass roots to such a change will now be more muted. Smaller practitioners have lost the bulk of the audit work that used to generate a large proportion of their fees. The increase in the audit exemption threshold means that the vast majority of practicing accounting firms are no longer regulated auditors. As a result there would no longer be widespread resistance to the idea of auditors being precluded from providing any non-audit services to audit clients.

    The audit profession should aspire to be recognised as a distinct branch of accountancy. This is very different to the historical view that auditors and accountants are one and the same (as they were effectively until the mid 1980s).

    >>>How can the audit profession develop the characteristics of a modern profession that enjoys public trust?

    See above. Although unwelcome the profession needs to accept responsibility for its work. Simpler and more user friendly disclaimers are required as to an auditor’s liability. Blanket exclusions of any liability undermine confidence and credibility.

    The public and the media need to be encouraged to do more than recognise the inherent limitations of scope of an audit. This too undermines credibility and confidence. Currently auditors (of big companies) charge a fortune for checking lots of things but then claim no responsibility for anything they have missed.

    There is also a huge gulf between those who engage the auditors and those who should be able to rely on their work. Auditors need to accept that they do have a degree of responsibility to shareholders and to creditors.

    Audit reports need to be clearer so that they make sense to the uninitiated.

    >>>Are there any professions whose journey is instructive?

    Possibly there are lessons to be drawn from the major changes 20 years ago to the stockbroking profession, also more recent changes to the world of Financial Advice and Banking.

    >>>Where can the audit profession add value in a public service landscape that is increasingly shaped by global challenges, social innovation and information complexity?

    Auditors could audit more than simply financial accounts. They could audit other complex data sets too. One novel idea would be to offer independent audits of website analytics and Internet marketing efforts (eg: to provide independent verification or forensic interpretation of claims and assertions about the number of opted in names on mailing lists that are used to influence collaborators and advertisers). Could the media be audited in any way?

    >>>What are the areas in which we need trust and assurance?

    Is the NAO adequately resourced and does it have a sufficiently high profile for the important work it carries out?

    Many of the aspects of public life in which we need trust and assurance are already subject to audit by the NAO.