VP of Business Development Circit
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Audit breaches call for Open Banking audit tools

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Recent audit failures from UHY Hacker Young and Haysmacintyre, resulting in fines from the FRC, highlight the need for reliable Open Banking audit tools.

2nd Jun 2021
VP of Business Development Circit
Columnist
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It’s rare for a week to go by without hearing another high profile audit failure. But many of the breaches are unintentional, caused by inadequate tools to complete audits.

Recent examples of audit failures are the sanctions brought against UHY Hacker Young and their audit of Kenneth Kajang Rubber, and Haysmacintyre’s audit of Associated British Engineering. The latter resulted in the audit partner and firm being reprimanded and correspondingly being fined £17,500 and £125,000 by the FRC.

Potential litigation cases can be avoided by implementing open banking tools to overcome many of the associated common failures.

This technology is relatively nascent, but auditor adoption will help improve the profession's image from fewer failures and reduce the cost of doing business and lead to higher quality audits. 

Audit failure is damaging in many ways 

Audit failure can have adverse implications for firms in several different ways. Unfavourable national and trade press coverage makes it harder for firms associated with failure to retain clients, win new ones and attract staff members.

Among the Big Four, instances of audit litigation often make the national news due to the audited companies being well-known, industry leaders or household names from the FTSE 100 or FTSE 250.

The pressing need for audit improvement is highlighted by a third of FTSE 350 audits inspected last year requiring improvement. 

Audit is incredibly lucrative for large firms, with it often representing the lion’s share of revenue splits across service lines. 

Failing to hold on to high profile audit clients results in firms losing revenues in the imminent and future years, with failure also making it harder to win new clients.

Failings are often not deliberate

Many of the breaches associated with FRC cases are often not intentional and instead relate to auditors not having access to adequate tools and resources to analyse the vast data sets which modern businesses produce. 

The FRC described the breaches of the Haysmacintyre Associated British Engineering audit as not being “intentional, dishonest, deliberate or reckless.”

This must be doubly frustrating for audit firms, with the FRC noting that Haysmacintrye were proactive in undertaking a “programme of remedial measures designed to address the shortcoming in the audit work.”

Based on audit firms showing a willingness to remedy their ways and not repeat mistakes, they need to be provided with better tools to do their job.

Open banking audit tools can overcome many audit failings

Many of the failings associated with Haysmacintrye’s Associated British Engineering audit could have been avoided by using open banking enabled audit tools. 

Specifically, the breaches related to inventory, journal entry testing, revenue recognition and debt recovery, defined benefit pension scheme, going concern and the review and supervision of the audit. Of these six areas, open banking audit tools would have reduced the risks associated with revenue recognition, debt recovery, going concern and overall review.

Open banking technology allows firms to access a complete data set of banking transactions related to both the period being audited alongside post-year end transactions through to the present day. 

This can be used to seamlessly and speedily assess whether outstanding debtors have been paid after year-end, support the going concern basis with future insight of cash inflows and outflows and also as a means to detect potential fraud from identifying outliers and large one-off transactions. 

Open banking adoption will improve audit quality and enhance the profession

In addition to reducing the likelihood of audit failure, firms' utilisation of open banking solutions will also improve audit quality and allow auditors to carry out their roles more efficiently. 

Analysing a complete digital set of bank transactions creates the potential for auditors to test 100% of transactions instead of a sampling approach. This will allow auditors to test all transactions rather than just those which breach the materiality threshold or are selected randomly in samples.  

This will improve the quality of audits and help manage the expectation gap, defined as the difference between the public perception of an auditor’s role and the legal responsibilities of an audit. In addition, this will help restore trust in the profession at a time when there have been numerous calls for reform. 

To encourage open banking in audits, there must be more awareness of how related tools can help solve many of the issues associated with audit failure.

An effective way of doing this could be audit firms demonstrating learnings from sanctions by showing the FRC (and the expected subsequent regulator AGRA) a commitment to fix their practices by adopting open banking within existing audit procedures

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