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The FRC issues guide to what all auditors should already know

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Will the Financial Reporting Council’s guidance for auditors have the desired impact or is it too little – and decades too late?

7th Jul 2022
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The Financial Reporting Council (FRC) has consistently failed to achieve its goals, with auditors’ standards seemingly dropping by the week, to the point where they are about to disappear for ever. Before the guillotine finally drops, the FRC has issued a professional judgement framework, the principles of which are summarised in a colourful wheel of data in a style beloved by marketing gurus.

Some form of auditing has been around since the Middle Ages or before and the discipline was almost certainly used in some form by the ancients.

Looking at the position today, the big auditing firms may have consolidated but their roots go back a century or more. You might have thought that in all of that time some of the greatest brains of their generations would have formulated a means of reviewing accounts that didn’t constantly end in embarrassing disaster. If so, you were wrong.

The FRC constantly reports on glaring failings, while the media is only too happy to pick up on disasters, which they often justifiably attribute to inadequacies from those at the top of our profession.

Beyond satire

Therefore, it is quite depressing to find that the FRC feels the need to publish a glossy document (plus supporting paperwork) that might have been subtitled Auditing for Dummies, had the title not already been used for a satirical book.

This is not in any way to denigrate the good sense of many of the recommendations. The point is that auditors should already be carrying out every one of the policies proposed plus many more, were they capable of, or interested in, carrying out thorough audits that are fit for purpose.

While these general observations apply to the whole document, when it is broken down into its four constituent parts, each one comprises little more than common sense and a reminder of what so many of us spent three or more years studying before satisfying examiners that we were competent to work in the profession.

Telling auditors that they need to have the right mindset can easily be seen as insulting. Instead, it is necessary.

In particular, as my colleague Mark Taylor so eloquently explains, there is serious concern about the lack of professional scepticism. With all due respect though, this should have been addressed at least a decade and possibly a century ago.

Clearly, far too many auditors are more interested in cutting costs and ticking boxes than actually protecting stakeholders and doing their best to ensure that accounts show a true and fair view.

Interesting thinking

Some of the psychological stuff in the document is genuinely interesting and appears to draw on Daniel Kahneman’s seminal work, Thinking, Fast and Slow, about which I will write at some point in the next few weeks.

Similarly, sections on Professional Judgement Trigger and Process, Consultation and Environmental Factors are all worthy but should have been absorbed, if not necessarily with our mothers’ milk at least while we were training to become qualified accountants.

Having said all of this, I would urge anyone who is or aspires to be an auditor to pick up the document and read it in detail.

If nothing else, you will be forearmed as there is every chance that disciplinary panels in future will seek to use parts of the data as weapons with which to attack substandard work.

Showing my own professional scepticism, I fear that this will go straight over the heads of those who most desperately need to learn humility and a few lessons about protecting their clients, their firms and stakeholders more widely – until they eventually get hauled up before the beak and have their inadequacies aired in public at the same time as attracting a hefty but perfectly manageable fine.

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