Audit culture based on blame rarely supports qualityby
With audit under increasing scrutiny Julia Penny explains why audit firm culture needs to focus on quality first, and not 'client' satisfaction or blame.
During late June 2021 the FRC held a series of lunchtimes webinars on audit quality, with a particular emphasis on audit firm culture.
Far too much was covered in the five webinars to summarise them in a single article, but some of the points on audit firm culture seemed worth considering.
The Big Four have, over the last several years, been prompted by the regulator to think about their culture and whether it supports quality. But what about all the other firms that do audit - at the last official count in the FRC Key Facts and Trends 2019 there were 5,127 firms registered as auditors. How can all firms build a culture that supports audit quality?
Judgment and its role in quality
Effective audit will never be a mere tick-box exercise, but as many auditors (and even more ex-auditors) might attest, it is in danger of so becoming. Perhaps it is not much of a surprise, when there are thousands of pages of requirements in auditing standards, that firms require a lot of boxes to be ticked.
But with a focus on compliance, the bright, enthusiastic and questioning individuals that come out of school and university to train as auditors might find they forget to be curious, to enquire, to notice and highlight what doesn’t seem right. Partners and managers are not immune to this impact and may also find their focus drawn to ensuring that all the boxes are ticked.
Firms need to work to develop or maintain a culture that supports auditors in raising and resolving difficult questions, ie making appropriate judgments. Tools that can be used to help achieve this include the following:
- Partner remuneration being firmly based on quality (not selling and not client satisfaction);
- Individuals at all levels being supported by the firm when they raise questions or concerns with a client or team member, in particular:
- Partners need to back up more junior staff when they ask awkward questions and certainly must not chide them for upsetting the “client”
- The firm needs to back up partners when they challenge management or decide to issue a modified audit report;
- Strong critical thinking skills for all members of the audit team;
- The audit plan including enough time to think about judgmental areas, even at more junior levels.
Building a culture of quality
The trouble with culture is that it has a habit of just developing. It is, after all, ‘the collection of values, expectations and practice that inform the actions of team members’.
So with no active efforts to build culture it will nonetheless develop by what team members see, hear and experience when they work on audits. If you want to develop a culture that enhances audit quality, then you need to consider how that might be done.
It can be informative to consider other industries’ work on culture, for instance in developing a quality culture around safety. On the FRC’s webinar, guests from The Civil Aviation Authority (CAA) talked about this with a practical example.
An incident at an airline during routine maintenance led to a tool being left in the aircraft where it then caused millions of pounds of damage and could have led to severe safety issues. The reaction of the airline could have been to sack the individual involved for being negligent.
But if that had happened the culture that is likely to be built will be one where individuals fear being found out for doing something wrong, or fear their colleagues being found out. They know that “heads will roll” and so they are likely to become protectionist and keep quiet.
In order to achieve a quality culture where tools are not left in a dangerous place you need to understand why they were left there. You can then build a culture that accepts that we all make mistakes, that we learn from mistakes and that improvements can be made to help improve quality or safety in the future.
In this CAA example, the individual who left his tool in a dangerous place was not sacked, but recruited to a project to improve procedures. The individual championed these new procedures and helped to drive up safety compliance. The organisation used an approach of learning from their failure, rather than indulging in a blame game.
In audit, poor work might be done on an area because the team runs out of time, or other problems arise. You need the team to feel empowered to speak up, to explain what is needed to complete a quality audit.
If they are worried about being given a metaphorical black mark, they may try to cover up that work has not been done properly. Or partners may be worried about losing a client and will seek to keep them at any cost if the firm is too focused on partner fees. An appropriate culture will focus on what achieves quality, not what maintains the top or bottom line.
This article merely touches on the issue of audit quality and how culture might have an impact. The FRC webinars provide more information on the topic, as does the 2018 Thematic Review. One thing is clear though: a culture based on blame rarely supports quality.
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Julia Penny is the principal of JS Penny Ltd which provides technical and training consulting on anti-money laundering procedures, auditing and financial reporting. Julia is a member of ICAEW Board and Council, chair of the ICAEW Ethics Advisory Committee and past chair of the ICAEW...