Herbert M. Chain is a highly experienced auditor and is a financial expert with over 45 years of experience in business, accounting, and audit, having served as a Senior Audit Partner at Deloitte. He holds certifications from the National Association of Corporate Directors and the Private Directors Association, with knowledge of private company governance and effective risk management. He has extensive knowledge in the financial services sector, including asset management and insurance.
Group audits have become a focus of standard setting and regulatory bodies based on the potential risks arising from deficient oversight, communications and risk assessment.
In April 2022, the IAASB published a revised standard on ISA 600 Audits of Group Financial Statements (Including the Work of Component Auditors). This introduced significant changes to the audit of groups for periods commencing on or after December 15, 2023 (with early adoption permitted). The UK’s FRC followed suit and published ISA (UK) 600 (Revised September 2022).
In June 2022, the US Public Company Accounting Oversight Board adopted AS 1206: Dividing Responsibility for the Audit with Another Accounting Firm, which will be effective for fiscal years ending on or after December 15, 2024.
In March 2023, the US Auditing Standards Board issued a new standard for group audits (SAS No. 149, Special Considerations — Audits of Group Financial Statements (Including the Work of Component Auditors and Audits of Referred-to Auditors) effective for periods ending on or after December 25, 2026.
The new and revised requirements are generally similar, with the objectives of strengthening the auditor’s responsibilities related to professional skepticism, planning and performing a group audit, enhancing two-way communications between the group auditor and component (or “referred to”) auditors, and enhancing auditor documentation.
This article will focus on the new US standard. We recommend reading the standard itself to gain a fuller understanding.
SAS No. 149 addresses special considerations that apply to a group audit, including in circumstances in which component auditors are involved or when the group auditor makes reference to the audit of a referred-to auditor. It adopts the terminology contained in ISA 600, some of which is new to GAAS in the United States and some of which replaces certain terms previously used in US GAAS (i.e., in AU 543). For example, the term “group auditor” replaces the term “principal auditor”.[1]
SAS No. 149 covers the use of “component” auditors as well as “referred-to” auditors. A component auditor is a part of the engagement team. Accordingly, the group auditor takes responsibility for the component auditor’s or auditors’ work and, accordingly, must perform certain procedures in relation to the component auditor such as understanding the willingness to comply with ethical requirements (including those relating to independence), the professional competence and capabilities, the ability of the group auditor to be involved in the component auditor’s work (i.e., review the component auditor’s working papers), and the regulatory environment that the component auditor operates in. Component auditors are part of the engagement team and may include a network firm, a firm that is not a network firm, or the group auditor’s firm (for example, another office within the group auditor’s firm).
A referred-to auditor is an auditor who performs an audit of the financial statements of a component to which the group auditor determines to make reference in the auditor’s report on the group financial statements. A referred-to auditor is not a component auditor, and accordingly, is not a part of the engagement team for a group audit. In such cases, the group auditor should make the referred-to auditor aware of the relevant ethical requirements and should confirm whether the referred-to auditors understand and will comply with the ethical requirements (including those related to independence). The group auditor should also determine that the referred-to auditors have the appropriate competence and capabilities, and should obtain sufficient appropriate audit evidence relating to the work to be performed at the component if the referred-to auditor does not comply with the relevant ethical requirements or the group auditor has “serious concerns” about these matters.
Global audit engagements (i.e., group audits) bring with them unique risks and requirements, whether the involved firms are from the same network or not. For Kreston Global group audits, the Global Audit Group is working toward a consistency of approach and service levels, including standardising communication templates and requirements.
If you would like to speak to one of our experts about a group audit, please get in touch.
[1] It should be noted that the PCAOB refers to the group audit partner as the “lead” auditor.
[2] ISA 600 does not permit the auditor’s report on the group financial statements to make reference to a component auditor unless required by law or regulation to include such reference.
News
Herbert M. Chain
Shareholder, Mayer Hoffman McCann P.C, Deputy Technical Director, Global Audit Group, Kreston Global
Herbert M. Chain is a highly experienced auditor and is a financial expert with over 45 years of experience in business, accounting, and audit, having served as a Senior Audit Partner at Deloitte. He holds certifications from the National Association of Corporate Directors and the Private Directors Association, with knowledge of private company governance and effective risk management. He has extensive knowledge in the financial services sector, including asset management and insurance. Herb is a member of MHM’s Attest Methodology Group and serves as Deputy Technical Direct of Kreston Global’s Global Audit Group.
Auditing standards: Unpacking SAS 143 and SAS 145 updates
March 12, 2024
In his comprehensive overview, Herbert M. Chain from MHM explores the recent updates to SAS 143 and SAS 145, which signify significant milestones in auditing standards. Read the full article here, or the summary below.
Overview of SAS 143 and SAS 145
The issuance of SAS No. 143, focusing on Auditing Accounting Estimates and Related Disclosures, and SAS No. 145, centered on Understanding the Entity and Its Environment and Assessing Risks of Material Misstatement, represents a significant advancement in auditing standards. These standards offer auditors extensive guidance for testing accounting estimates, particularly those involving fair value, and outline essential requirements for grasping the entity’s internal control system. This is crucial in navigating the complexities of the contemporary economic, technological, and regulatory accounting environment.
SAS 143: Auditing accounting estimates
Effective for audits of periods ending on or after Dec. 15, 2023, SAS 143 mandates a deeper examination of uncertainties in accounting estimates, focusing on potential management bias. This involves a thorough evaluation of assumptions, especially for significant judgments like fair value measurements. The standard necessitates a detailed risk assessment tailored for complexities in auditing accounting estimates, providing guidance on responsive audit procedures, including assessing the suitability of valuation models and data integrity for fair value estimates. SAS 143 aims to enhance transparency and accountability in fair value estimation, ultimately improving the quality and reliability of these estimates for increased stakeholder trust.
Key changes from SAS 143
Key changes to auditing standards in SAS 143 include a heightened emphasis on auditors addressing estimation uncertainty and exercising professional skepticism in evaluating fair value estimates. The standard mandates a more detailed risk assessment process tailored for complexities in auditing accounting estimates, particularly fair value estimates. Additionally, auditors must assess the reasonableness of accounting estimates within the financial reporting framework, ensuring compliance with permitted methods, assumptions, and data.
SAS 143impacts
SAS 143 brings substantial changes to the audit process in assessing fair value estimates. The focus now shifts to understanding factors and assumptions behind estimates, demanding greater transparency and accountability from management. Auditors, in response, perform the following procedures:
Method Assessment: Evaluate if the method aligns with the financial reporting framework and remains consistent. Changes prompt scrutiny for potential bias.
Significant Assumptions: Ensure suitability of assumptions within the financial reporting framework, considering both positive and negative outcomes. Evaluate consistency with prior periods and other business activities, considering potential bias.
Data Evaluation: Assess data reliability, understanding sources and consistency with prior periods. Verify relevance in the context of the chosen method and assumptions, addressing potential bias.
Management’s Point Estimate: Scrutinise alternative outcomes and assumptions when management opts for a precise value (point estimate), evaluating potential bias.
Enhancing controls with SAS 145
SAS 145, also effective for audits for periods ending on or after Dec. 15, 2023, revises aspects of the risk assessment process, focusing on an entity’s internal control system. Notably, it enhances auditor responsibilities related to evaluating the design and implementation of controls, including IT general controls (ITGC). The standard recognises the increasing significance of an entity’s IT environment, requiring auditors to identify and assess ITGCs, categorised into four domains:
Security and Access: Controls ensuring appropriate user access, segregation of duties, and ongoing authorisation for IT applications and cloud providers.
Systems Change: Controls over designing, testing, and migrating changes into a production environment, with segregation of access to prevent unauthorised changes.
System Development: Controls over initial IT application acquisition, development, or implementation, including data conversion and creation of new reports.
Computer Operations: Controls monitoring financial reporting program execution, ensuring backups, and enabling timely data recovery in case of outages or cyberattacks.
While not all domains may be applicable annually, SAS 145 mandates evaluating design and implementation for relevant ITGCs within the applicable domain for each identified significant IT application. The standard also introduced the concept of a continuum of inherent risk as well as other changes.
If you are interested in doing business with Kreston Global, contact us here.
News
Julius Cincala
Partner at Kreston Slovakia
Julius Cincala is a partner at Kreston Slovakia, leading risk advisory and management consulting practices.
Zuzana Siderova
Tax Manager, Tax Advisor and Transfer pricing specialist, Kreston Slovakia
Zuzana, a Slovak accounting specialist, manages tax advisory and compliance projects, has expertise in financial audits, corporate and personal taxation, international taxation, value-added taxation, and transfer pricing across diverse business domains.
EU Sustainability Regulations
January 12, 2024
Sector:Energy, ESG, Finance
Central Europe’s manufacturing sector is being reshaped by EU Sustainability regulations, impacting countries like Slovakia, Romania, and Hungary. The aftermath of the Ukraine war and Germany’s reevaluation of its reliance on China have disrupted supply chains, driving up power costs and prompting a shift towards cleaner energy sources.
EU sustainability regulations impact on Central European manufacturing
Central Europe has traditionally played a smaller role in global manufacturing figures than other European neighbours. However, since the outbreak of the Ukraine war and Germany’s pre-Covid reliance on China, broken supply chains have driven up power costs.
Higher prices and new carbon reduction regulations favourably reposition countries like Slovakia, Romania and Hungary who have some of the highest shares of electricity from clean sources well above the West European average.
As the European Union grapples with balancing new environmental standards and maintaining its competitive edge on the global market, ambitious countries like Slovakia are becoming test beds for the new sustainability-focused landscape. With the advent of carbon emissions reporting within the EU, will listed and large companies relocate in droves to save money and carbon?
Driving carbon emissions down and costs up
The EU’s commitment to environmental sustainability is not without its challenges. Činčala believes that it will be easier to relocate manufacturing outside of Europe, rather than deal with the complexity of carbon emission reporting, while the process is being established,
“Slovakia has always been an industrial country. However, the higher power costs have seen companies seek to relocate manufacturing operations to China. We see this with our clients now. They are freezing operations as transforming their business to meet carbon emissions far outweighs any cost saving or carbon saving they receive from being in Slovakia.
Tax on imports
Although alarming, Činčala has been advising the Slovak government on dealing with these challenges for over 25 years, so has a clear view on the options available to the EU.
“If we want higher investments in green energy and business transformation we have to invest more in education, people, and transformation models. Currently, products that are manufactured outside of the European Union are cheaper because they’re not subject to the same level of regulation and transformation costs we face in the EU. This is why we need to find a way to fortify ourselves and our market. For example, by introducing new tax regulations on products made in third countries and imported into the EU.”
Transfer pricing compliance
With some unrest in the region, Činčala’s colleague, tax expert Zuzana Sidorová, has advice for any businesses moving operations around Europe, specifically into Slovakia,
“In recent months, a number of companies have approached us to transfer their business from Ukraine territory to Slovakia or to another European country.”
In Slovakia, any company that does transactions within its group, either locally or across borders, must follow transfer pricing rules, in line with the OECD (Organization for Economic Co-operation and Development) guidelines.
Common Transfer Pricing challenges in Slovakia
In Slovakia, many international companies are considered “limited risk,” like manufacturers, distributors, or service providers. These companies often report losses despite having little decision-making power. Sidorová has clear advice for companies with limited risk businesses in satellite European countries;
“From a transfer pricing perspective, they shouldn’t be reporting losses. Tax authorities often investigate these loss-reporting, internationally-owned companies, leading to lengthy and difficult tax audits. These audits can result in extra corporate taxes and can be extended to cover multiple tax periods.”
Transfer Pricing benchmarks
Sidorová advises her clients making cross-border or local (Slovak) intra-group transactions needs to review and update its transfer pricing file on a yearly basis. The benchmarking analysis must be prepared every three years, with annual financial updates of comparables (compliance with OECD transfer pricing guidelines).
Staying competitive
As the EU intensifies its sustainability focus, companies in Slovakia must adapt quickly. Success hinges on embracing green technology and understanding local tax and transfer pricing rules. It’s essential for businesses to align their operations with EU environmental goals, not just to comply with regulations, but to stay competitive and sustainable in the long run. Keeping up to date with any rapid tax updates in response to competitive markets is vital to maintain the viability of companies based in Slovakia. This strategic alignment by Slovakian companies is not only crucial for their own sustainability but also serves as a model for the wider European Union, demonstrating how economic resilience and environmental responsibility can coexist and drive progress across the continent.
Herbert M. Chain is a highly experienced auditor and is a financial expert with over 45 years of experience in business, accounting, and audit, having served as a Senior Audit Partner at Deloitte. He holds certifications from the National Association of Corporate Directors and the Private Directors Association, with knowledge of private company governance and effective risk management. He has extensive knowledge in the financial services sector, including asset management and insurance. Herb is a member of MHM’s Audit Methodology Steering Committee.
As Kreston Global’s Director of Quality and Professional Standards, Jenny oversees the onboarding process of prospective member firms. She is in charge of the quality standards for all member firms and within that standard setting, works with members to identify priority areas for professional development and training. In addition, Jenny works with Kreston’s Quality Group to review standards across the network.
International Quality Management: The path to excellence in accounting networks
November 29, 2023
Embracing international Quality Management in accounting networks
Excellent international Quality Managementis a cornerstone for the success of global accounting networks, offering numerous benefits including enhanced efficiency, productivity, and a competitive edge. Establishing excellent International Quality Management is explored in a recent article by Jenny Reed, Director of Quality and Professional Standards at Kreston Global, and Herbert M. Chain, Director at CBIZ Marks Paneth and Shareholder at Mayer Hoffman McCann P.C., published in the International Accounting Bulletin. Read the full article here, or the summary below.
Establishing a culture of quality
Leadership’s role in cultivating Quality: The success of Quality Management initiatives heavily relies on leadership’s commitment. This includes establishing a quality-oriented culture, setting high standards, and leading by example to ensure adherence to these standards across all levels.
The challenges in Quality Management
Navigating resistance and standardisation: Resistance to change is a common hurdle. Effective change management and the harmonisation of standard practices are critical for achieving consistency in service quality, especially in a network of independent firms.
Training and continuous improvement: Ongoing training and development are essential for upskilling professionals and fostering a culture of continuous learning and improvement.
Key Performance Indicators (KPIs): Implementing KPIs aids in measuring and enhancing quality across the network, encompassing both qualitative and quantitative aspects.
Client engagement and feedback: Establishing mechanisms for regular client interaction and feedback is pivotal for continuous improvement and maintaining high service standards.
Leveraging technology and automation: The integration of advanced technologies and automation tools is crucial for enhancing efficiency and service quality.
Monitoring and review processes: Regular assessments and peer reviews are vital for maintaining accountability and continual enhancement of quality standards.
Constraints in a global context
Dealing with diversity and resource allocation: Addressing the challenges posed by geographical and cultural diversity, and the unequal distribution of resources is essential for consistent quality management.
Compliance and regulatory challenges: Understanding and adapting to varied compliance requirements and regulatory frameworks is key to maintaining quality standards.
Technology maturity of firms: Bridging gaps in technological maturity among member firms is crucial for effective quality management.
Conclusion
In conclusion, the journey towards implementing a robust quality management system in a global network, while challenging, is vital for enhancing reputation, client satisfaction, and competitive positioning. With committed leadership and a collective approach, these challenges can be successfully navigated.
To speak to one of our team about international Quality Management, please get in touch.
News
Jenny Reed
Director of Quality and Professional Standards at Kreston Global
Jenny oversees the onboarding process of prospective member firms as well as the ongoing development of training and resources. She will be working with member firms to identify priority areas for professional development and training, as well as working with Kreston’s ESG Advisory Committee.
Herbert M. Chain
MBA, CPA (USA), Director, CBIZ Marks Paneth, and Shareholder, Mayer Hoffman McCann P.C.
Herbert Chain is a highly experienced author is a financial expert with 40 years of experience in business, accounting, and audit, having served as a Senior Audit Partner at Deloitte. He holds certifications from the National Association of Corporate Directors and the Private Directors Association, with knowledge of private company governance and effective risk management. He has extensive knowledge in the financial services sector, including asset management and insurance, and experience with SPACs.
Quality without borders: Quality management in a global network of firms
November 24, 2023
Quality management is crucial to maintain and enhance a global network’s reputation, protect the public interest, ensure client satisfaction, attract and retain top talent, and build a network’s competitive edge. It is also required by regulators and professional bodies.[1] Additionally, the International Standards on Quality Management (ISQM) provide a globally recognised framework for quality management in the accounting and auditing profession. Adhering to the ISQM requirements is essential for global networks to demonstrate the commitment of their member firms to delivering high-quality services.
For global networks, dispersed across countries and regions, and composed of independent firms, maintaining consistency and excellence presents unique challenges. A commitment to quality by global and firm leadership is essential to set the standard, demonstrate a tone at the top, and encourage (and require) appropriate behavior.
Critical elements of quality management
Culture, culture, culture
Leadership must emphasise the importance of quality at all levels of the network, develop a culture of quality, and communicate expectations for behavior. It must also encourage a culture of continuous improvement. This means creating an environment where staff feel comfortable identifying and reporting problems and where there is a process for addressing those problems.
It also requires those in authority within the firm to “walk the talk” (i.e., “tone from the top”) and not to ignore those who either believe themselves to be exempt from the standards that apply to others, or whose moral compass does not point to true north. Such inaction is very visible to staff and will undermine the effectiveness of a firm’s stated and/or documented policies and procedures, however good they may be.
2. Overcoming resistance to change
For most organisations, global or domestic, resistance to change can hinder the successful implementation of any initiative, including a quality management system. To overcome this, the organisation and its leadership must foster a change management culture by involving stakeholders at all levels and at all stages in the process, providing clear communication about the benefits of the new system(s), and demonstrating its positive impact on quality, firm success ad reputation, and client satisfaction.
3. Standardisation and harmonisation
One of the key factors in promoting effective quality management across a global network of independent firms is the establishment of standardisation and harmonisation protocols. Developing a set of standardised processes, methodologies, and best practices ensures uniformity in service delivery, documentation, and work performance. This can be achieved through the implementation of a global quality management system, which outlines the framework for quality objectives, procedures, and responsibilities. It should also encompass continuous improvement initiatives, regular performance reviews, and quality audits. While non-standardised methodologies and policies can still result in quality performance of services, standardisation permits effective resource sharing, scalability of operations, and consistent documentation frameworks.
In a diverse network of independent firms, there will always be aspects of quality management that need to be firm-specific for maximum effectiveness, but alignment of policies and procedures will often be beneficial and cost effective. The introduction of ISQM1 has helped accelerate this process for global firm networks.
4. Training and development
Investing in comprehensive training and development programs is vital to enhancing the capabilities and competencies of professionals within the network. Providing regular training sessions, workshops, and certifications not only strengthens technical skills but also cultivates a culture of continuous learning. Additionally, sharing knowledge and best practices among member firms through online platforms and collaborative forums fosters innovation and improvement across the network.
A focus on efficiency through these types of training and collaboration initiatives can also indirectly contribute towards audit quality. Streamlining processes and cutting out unnecessary work and/or documentation frees up staff to focus their time and effort on more important (i.e., riskier) matters.
5. Key Performance Indicators (KPI)
KPIs, sometimes known as Audit Quality Indicators (AQIs), play a vital role in measuring and monitoring quality across the network. It is important to define meaningful KPIs that align with the organisation’s overall objectives and values. These indicators should include both qualitative and quantitative metrics, such as client satisfaction ratings, adherence to industry standards, results of inspections or quality reviews, and employee training and development.
6. Client engagement and feedback
Quality management should extend beyond internal processes to include effective client engagement and feedback mechanisms. Regular communication channels should be established to capture client expectations, needs, and satisfaction levels. Implementing client feedback surveys, conducting post-engagement reviews, and actively seeking client input helps identify areas for improvement and enhances client relationships. This feedback loop is crucial for maintaining high-quality services and driving continuous improvement efforts.
7. Technology and automation
Leveraging technology and automation tools plays a vital role in streamlining processes, minimising errors, and maximising efficiency. Implementing next-generation accounting and auditing software systems (including artificial intelligence applications), data analytics tools, and workflow automation platforms can significantly improve the ability to analyze data, reduce work times, and enhance the quality of work performed. For example, dashboarding tools such as Caseware Sherlock can automatically measure and report on KPIs such as time to lock down the file, number of review points raised etc.
Regularly assessing and adopting emerging technologies ensures that the network remains at the forefront of industry advancements and accesses effective and efficient methodologies for performing engagements.
8. Monitoring and review
The network must have a system for monitoring and reviewing the quality of its work. This system should identify areas where improvement is needed and permit the network to take steps to address those areas.
Collaboration and peer review processes foster a culture of accountability and continuous improvement. These encourage cross-firm and cross-border collaboration, and allow firms to learn from one another, share best practices, and review each other’s work. Implementing robust peer review mechanisms helps identify areas for improvement, rectify errors, and ensure adherence to quality standards. The feedback received from these reviews should be used to refine processes, address gaps, and strengthen the overall quality management system.
Whilst the main objective of a global quality review program will always be to ensure that member firms can refer their clients to other member firms with confidence, the program should also aim to provide objective, constructive and friendly advice and recommendations to firms based on the reviewer’s own experience and best practices seen elsewhere within the network.
Constraints and overcoming the challenges
While pursuing quality management objectives, several constraints may arise. Identifying and overcoming these challenges is essential. Here are some common constraints and suggested approaches to overcome them:
Geographical and cultural diversity
The global nature of networks may introduce variations in language, cultural practices, and legal frameworks. Overcoming this constraint requires promoting cross-cultural understanding, establishing clear communication channels, and conducting regular cultural training sessions. Adaptation to local regulatory requirements while maintaining global quality standards is also crucial.
While a baseline framework is essential, it must be flexible enough to accommodate variations arising from local regulations, industry practices, and cultural norms. Encouraging local participation in the development of quality standards ensures that the quality management system is adaptable and relevant to different contexts.
Whilst challenging, diversity within the network can also have a positive benefit, providing firms with new perspectives and insights from those firms who take a different approach. Collaborating internationally can generate ideas and ways of thinking that can unlock innovative solutions to problems and challenges.
Resource allocation
Unequal distribution of resources and varying levels of expertise among member firms can hinder quality management efforts. Addressing this constraint involves developing resource-sharing mechanisms, fostering collaboration, and conducting knowledge transfers among firms, recognising that when accomplished, the network as a whole is stronger and all benefit. Centralised resource pools, mentorship programs, and secondment (i.e., outsourcing) opportunities can help balance expertise and optimise resource allocation.
Compliance and regulatory challenges
Different countries may have different compliance requirements and regulatory frameworks, making it challenging to maintain consistent quality practices. Overcoming this constraint necessitates establishing an understanding for such differences and incorporating them into the design of any quality management system. Standardising core compliance processes while allowing for necessary local adaptations ensures compliance while preserving quality standards.
With a global network also comes the requirements to monitor services provided to clients across the network to minimise the risks of breaches of the independence rules on financial interests, mutuality of interest, and scope of services. This has been a significant emphasis on the part of the largest global firms and their networks, especially as related to their public clients, but it also is important for mid-sise networks and even associations. These risks can be overcome by effective communications among network member firms, awareness of services being provided by member firms, and, as often practiced by the larger global networks, the designation of a lead client relationship partner for the client whose responsibilities include monitoring and improving services to be provided by the network before engagement. Firms have also made significant investments in technology to track global services being provided by member firms.
Technology maturity of firms
Unequal technological infrastructure and varying levels of technological maturity can impede effective quality management. Overcoming this constraint involves providing adequate technical support, training, and access to essential technologies, providing standardised tools and systems while allowing flexibility to accommodate local IT infrastructure and preferences. Encouraging knowledge-sharing among member firms regarding technology implementation and providing incentives for adopting new tools can drive technological advancement throughout the network.
Conclusion
Developing, implementing, and enforcing a quality management system for independent firms within a global network is a daunting, yet achievable, task. With the support of senior leadership and the board, and the support and will of the leadership of member firms, however, it is doable – and will maintain and enhance the network’s reputation, protect the public interest, ensure client satisfaction, attract and retain top talent, and build a competitive edge.
[1] Note the recent enforcement actions by the U.S. Public Company Accounting Oversight Board and Securities Exchange Commission, the UK’s Financial Reporting Council, and other regulatory bodies against public accounting firms relating to lapses in their engagement performance and firm-level quality management systems.
News
Herbert M. Chain
Shareholder, Mayer Hoffman McCann P.C. Deputy Technical Director, Global Audit Group, Kreston Global
Herbert M. Chain is a highly experienced auditor and is a financial expert with over 45 years of experience in business, accounting, and audit, having served as a Senior Audit Partner at Deloitte. He holds certifications from the National Association of Corporate Directors and the Private Directors Association, with knowledge of private company governance and effective risk management. He has extensive knowledge in the financial services sector, including asset management and insurance.
Ensuring trust: The crucial role of auditor independence
November 3, 2023
Auditor independence is critical to the credibility of the auditing profession. It is essential that auditors be independent of their clients in both fact and appearance. Independence in fact means that auditors are free from any financial, business, or personal relationships that could impair their objectivity and are not subject to any influences that could impair their ability to exercise professional judgment. Independence in appearance means that auditors are perceived to be independent by a reasonable and informed third party.
The importance of auditor independence
The importance of auditor independence is recognised by auditing standards and regulators around the world. In the United States, the Public Company Accounting Oversight Board (PCAOB) is responsible for overseeing the audits of public companies. The PCAOB has issued a number of auditing standards that relate to auditor independence. The US Securities and Exchange Commission (SEC) has its own rules governing auditor independence, and has fined, sanctioned, and/or barred firms and their personnel for violating such standards.
There are three overriding considerations when evaluating independence.
Auditors cannot audit their own work. This is a fundamental principle of auditor independence. Auditors must be able to objectively evaluate the work of their clients, and they cannot do this if they are the ones who did the work in the first place.
Auditors cannot makemanagement decisions for their clients. This is because auditors must maintain their independence from their clients. If auditors start making management decisions, they will no longer be able to objectively evaluate the work of their clients.
Auditors cannot act as advocates for their clients. If auditors start acting as advocates, they will be perceived as being unable to objectively evaluate the work of their clients.
More specifically, these considerations are often subcategorized into:
Financial relationships: Auditors should not have any direct or indirect material financial interests in their audit clients. This includes investments in the client’s securities, loans from the client, and business relationships with clients or their affiliates.
Employment relationships: Auditors should not have close personal or professional relationships with their audit clients. This includes former employees of the client, spouses and relatives of employees, and directors of the client’s affiliates. This also includes the employment by the client of its auditor’s engagement team members. (This situation was specifically prohibited under the Sarbanes-Oxley Act of 2002 (SOX), subject to a “cooling off” period.)
Scope of services: Auditors should not provide non-audit services to their audit clients that could impair their independence. This includes accounting, bookkeeping, financial planning, and management consulting services. Regulators may have varying prohibitions; the specific rules must be assessed by jurisdiction and type of client (i.e., public, private, or governmental).
Mutuality of interest: Auditors should not have business relationships with their audit clients that could create a mutuality of interest. This may include joint ventures or other collaborations (e.g., software implementation agreements).
Threats and safeguards
Our regulators often define these risk as “threats”, and provide the related mitigating responses (or “safeguards”). Using this framework, the most common threats to an external auditor’s independence (and related safeguards) are:
Self-interest
Threat: This occurs when the auditor has a financial or other interest in the client that could impair objectivity. Examples include owning shares in the client company or having a close family member employed by the client.
Safeguard: Auditors should avoid having any financial or other interests in their clients. If such interests do exist, they should be disposed of, and safeguards should be put in place to mitigate the threat.
Self-review
Threat: This occurs when the auditor performs both audit and non-audit services for the client. This can create a conflict of interest, as auditors may be less likely to challenge the client’s management if they are put into the position of auditing their own work. Examples are preparation of the income tax provision or the determination of liabilities under a client’s employee pension plans.
Safeguard: If non-audit services are performed, they should be assessed by the auditor, and if the services create a significant threat, other actions or measures should be identified that could reduce the threat to an acceptable level so as to not so as to not impair the auditor’s independence. Additionally, management must designate a knowledgeable employee to supervise the auditor, take responsibility for the auditor’s work, and make the ultimate decisions. These requirements are often documented in the engagement letter and/or the management representation letter received by the auditor in connection with the audit.
Advocacy
Threat: This occurs when the auditor becomes too closely aligned with the client’s interests and acts as an advocate for the client or promotes the client’s interests or position. Examples include providing testimony on behalf of the client in a lawsuit or promoting investments in the client.
Safeguard: Auditors should be aware of situations that might place them in the position as an advocate. Any agreement with a client should be carefully reviewed before execution.
Familiarity
Threat: This occurs when the auditor becomes too familiar with the client’s management or employees and thus no longer exercises sufficient professional scepticism because the auditor has too much trust in the client and the client’s actions. This can impair the auditor’s professional scepticism and objectivity, as they may be less likely to question the client’s management or to report on any irregularities they find.
Safeguard: Auditors should maintain professional detachment from their clients, and consider rotating audit teams on a regular basis. This will help to reduce the risk of the audit team becoming too familiar with the client and its personnel.
Intimidation
Threat: This occurs when the auditor is influenced by threats, pressure, or coercion from the client or a third party. This pressure can come from threats to dismiss the auditor, to reduce the audit fee, or to retaliate in some other way. This threat was deemed significant enough that it was statutorily prohibited by the provisions of Section 303 of SOX.
What can an audit firm do to ensure compliance with professional auditor independence rules?
It is important to note that no safeguard can eliminate all threats to auditor independence. However, by implementing a variety of safeguards, firms can reduce these threats to an acceptable level.
Promote a culture of independence: Firms should promote a culture that emphasizes independence and ethical behavior, demonstrates a commitment to independence from the top leadership, and sets a tone of ethics and independence throughout the organization. Many firms provide access to ethical counselors or hotlines where professionals can seek guidance on independence-related concerns. Additionally, firms should provide regular training and educational programs for all professionals regarding independence rules, regulations, and ethical considerations. Firms should also establish and reinforce protocols for seeking consultation within the firm on independence and other complex issues (a “culture of consultation”).
Firm policies and procedures: Firms should have policies and procedures in place to identify and assess threats to independence, implement safeguards to mitigate those threats, and monitor compliance. Policies should be enforced consistently and fairly, promptly addressing any violations. These policies and procedures should be reviewed and updated regularly. Firms should also establish guidelines on employees accepting gifts, hospitality, or other favors from clients to prevent any influence on professional judgment. Additionally, member firms of a global network need policies in place to identify and clear potential conflicts of interest that might exist with other member firms. This includes establishing lines of communication and responsibility for such communications on a timely basis, especially in proposal situations.
Non-audit services: Audit firms should carefully assess the non-audit services that they provide to their audit clients and ensure that client management takes ultimate responsibility for the work and any decisions made as a result of the findings.
Client assessment and continuance: Before accepting a new client, firms should conduct a thorough assessment, ensuring there are no conflicts of interest or other factors affecting independence. This should also be performed annually as part of the client continuance process as well as be monitored during the performance of the engagement (i.e., being alerted to changed circumstances that might affect precious independence conclusions).
Annual independence representations: Require individual professionals to sign an independence representation reaffirming their commitment to objectivity and independence in all audit-related activities and to disclose potential conflicts of interests or independence issues. (Some firms require this on an annual basis; some firms also conduct regular independence checks (audits) for professionals to identify any personal or financial relationships that might compromise independence.)
Engagement team rotation: Even if not required by the relevant regulatory authorities (i.e., the PCAOB for US public company audits), if bandwidth permits, firms should consider rotation of audit engagement partners and key team members periodically to minimize familiarity threats and enhance objectivity. Some larger firms use inter-office partner assignments to mitigate staffing constraints.
Transparent communication: Auditors should maintain open communication with audit committees and promptly report any potential threats to independence. (This is a required communication under certain regulatory regimes, for example under Rule 3526 of the PCAOB in the US.)
Conclusion
Independence is a foundational requirement for external auditors. Our credibility and resultant conclusions are all affected (and judged) by our independence – in fact and appearance. Independence rules and the related situations are often complex and nuanced – and any situation must be carefully analyzed to reach the appropriate conclusion. Firms allocate significant resources to help them make the right decisions in the area and to reach the right answer. The risk of failure is significant, and failure can have reputational, and potentially existential, implications for firms.
If you would like to speak to us about your audit, please get in touch.
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World Ethics Day in the accounting industry
October 16, 2023
18 October is World Ethics Day, a global observance that promotes ethical practices and principles across various domains. At Kreston Global, we wish to use this opportunity to celebrate the crucial role of ethics in accounting, tax, and auditing. In these professions, ethics is more than a guideline; it’s the bedrock of trust, transparency, and accountability. It reminds professionals to uphold the highest moral and professional standards, particularly in our complex and interconnected world.
What is the role of ethics in the accounting industry? Ethics is of the utmost importance in accountancy. We are one of only a few industries with a Code of Ethics that sets out how professional accountants in practice and business should behave and act. It’s the cornerstone of our profession, guiding us in doing the right thing, even when no one is watching or would even notice.
You recently shared the 2023 edition of the International Ethics Standards Board for Accountants (IESBA) Code of Ethics. Are there any noteworthy updates you would like to comment on?
Yes! The IESBA Code of Ethics is usually updated annually to keep it up to date with all the latest developments in the profession, including consequential and conforming amendments resulting from changes to auditing standards, etc.
This year’s update includes two key revisions relating to (a) the definition of engagement team and (b) group audits. The revisions deal with the independence and other implications of the changes made to the definition of “engagement team” in the Code to align with changes to the definition of the same term in the ISAs and ISQMs. The revisions also address the independence considerations in a group audit situation. Both changes are effective for audits with periods beginning on or after 15 December 2023.
Ethics is at the heart of what you do. Have you any advice for managing ethics globally?
Perspective is critical. Sometimes, we can all get so close and involved with an issue that it can be challenging to keep a perspective on our actions. Having someone available within a firm to provide an independent view and opinion is really helpful.
Building the right culture within a firm is also essential, as it fosters openness, trust and confidence that if an issue is raised, it will be dealt with appropriately and not swept under the carpet. The right culture has to be built top-down and permeates the whole organisation. Ethics should be integrated into everything we do as accountants.
What challenges do members of the accounting industry face in today’s global environment?
There is ever-growing commercial pressure on accountants, sometimes resulting in incentives to do the wrong thing. Standing up for what is right can be incredibly difficult, sometimes to personal detriment, but it’s important that we do, as this encourages others to behave similarly. I’ve been in such situations, and it’s never easy, but the one thing we always carry with us is our reputation, and I treasure mine over and above any promotion, bonus or job prospect.
What are your key top tips for ethics in daily practice?
In a difficult situation, I always try to ask myself how my action (or inaction) would look to someone else. This is the core of the “reasonable and informed third party” concept, i.e. that even if something was technically not prohibited by the detailed rules, if a reasonable and informed third party would think it unethical, then you shouldn’t do it. It helps us not to try and bend the rules or look for loopholes; if it wouldn’t look right to a third party, we shouldn’t be doing it.
The best approach, though, is not to get into a tricky situation in the first place and thus avoid putting oneself into a situation which may result in an ethical dilemma. Avoiding temptation is much easier than resisting it!
Herbert M. Chain is a highly experienced auditor and is a financial expert with over 45 years of experience in business, accounting, and audit, having served as a Senior Audit Partner at Deloitte. He holds certifications from the National Association of Corporate Directors and the Private Directors Association, with knowledge of private company governance and effective risk management. He has extensive knowledge in the financial services sector, including asset management and insurance. Herb is a member of MHM’s Audit Methodology Steering Committee.
The auditor’s responsibility for “due professional care” under professional standards
October 6, 2023
Auditors have a responsibility to perform their work with due professional care. It is a fundamental principle of the auditing profession and is essential to maintaining public confidence in the integrity of financial reporting.
What is “due professional care”?
“Due care” is a legal term that refers to the standard of conduct that a person is expected to exercise in a particular situation. Public Company Accounting Oversight Board (PCAOB) AS 1015: Due Professional Care in the Performance of Work, discusses the obligation for due care and cites a well-known legal treatise, Cooley on Torts:
Every man who offers his services to another and is employed assumes the duty to exercise in the employment such skill as he possesses with reasonable care and diligence. In all these employments where peculiar skill is requisite, if one offers his services, he is understood as holding himself out to the public as possessing the degree of skill commonly possessed by others in the same employment, and if his pretensions are unfounded, he commits a species of fraud upon every man who employs him in reliance on his public profession.
Within an audit context
In the context of auditing, due professional care means that the auditor must exercise the same degree of skill and care that a reasonably prudent auditor would exercise in similar circumstances. It is a subjective standard, and what constitutes due professional care will vary depending on the specific circumstances of the audit. However, there are some general principles that can be applied to determine whether an auditor has exercised due professional care.
One important principle is that due professional care requires the auditor to be objective and independent. The auditor must not have any conflicts of interest that could impair their judgment. The auditor must also be familiar with the auditing standards that apply to the audit and must comply with those standards.
Another important principle is that due professional care requires the auditor to exercise professional scepticism. This means the auditor must not simply accept management’s representations at face value. The auditor must critically evaluate all of the evidence that they gather and must be prepared to challenge management’s assertions when necessary.
Professional standards in due professional care
The foundation of auditors’ due professional care lies in the standards set by professional and regulatory bodies. According to the American Institute of Certified Public Accountants (AICPA), “a member shall perform professional services with competence and due professional care.” The AICPA Code of Professional Conduct (Section 0.3000.060) requires members “to observe the profession’s technical and ethical standards, strive continually to improve competence and the quality of services, and discharge professional responsibility to the best of their ability.” This includes exercising due professional care in the performance of all professional services.
On the international stage, the International Ethics Standards Board for Accountants (IESBA) Code of Ethics for Professional Accountants has, as a fundamental principle, “Professional Competence and Due Care”, and notes that a professional accountant has a continuing duty to maintain professional knowledge and skill at the level required to ensure that a client or employer receives competent professional service based on current developments. A professional accountant should act diligently and in accordance with applicable technical and professional standards when providing professional services. Other professional accounting and auditing associations also have codes of conduct that address the auditor’s responsibility for due professional care. For example, the International Code of Ethics for Professional Accountants (including International Independence Standards) issued by the International Federation of Accountants (IFAC) includes as a fundamental principle “Professional Competence and Due Care”, and states that “a professional accountant shall perform professional services with due professional care, competence and professional judgment.” Subsection 113 requires a professional accountant to attain and maintain professional knowledge and skill, and to act diligently and in accordance with applicable technical and professional standards. It also requires the “exercise of sound judgment and skill”, and “maintaining professional competence” via professional development.
An auditor’s responsibility
Auditors have a responsibility to exercise due professional care in all aspects of their work, from planning and performing the audit to reporting on the results. Accordingly, this responsibility includes: • Obtaining sufficient appropriate audit evidence to support their audit opinion. • Exercising professional scepticism. This means the auditor must not simply accept management’s representations at face value. The auditor must critically evaluate all of the evidence that they gather and must be prepared to challenge management’s assertions when necessary. • Being familiar with the auditing standards that apply to the audit and must comply with those standards. • Being objective and independent. This means that the auditor must not have any conflicts of interest that could impair their judgment.
Conclusion
The responsibility for due professional care in auditing is not merely a professional obligation but a moral imperative. Auditors serve as gatekeepers of financial integrity (i.e., we serve the “public interest”), and their failure to exercise due professional care can have severe consequences for stakeholders and the auditors themselves. Auditors must remain vigilant, diligent, and sceptical throughout the audit process. By adhering to the standards set forth by professional organizations and regulatory bodies, auditors can fulfil their duty to the public. Regulatory bodies continue to scrutinise auditing practices, holding firms and professionals accountable for the failure to exhibit due professional care. In a world where financial markets are increasingly interconnected, upholding the principles of due professional care is not just a professional obligation—it is essential for maintaining our credibility as a profession.
If you would like to speak to a Kreston Global audit expert, please get in touch.
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Herbert M. Chain
Shareholder, Mayer Hoffman McCann P.C. Deputy Technical Director, Global Audit Group, Kreston Global
Herbert M. Chain is a highly experienced auditor and is a financial expert with over 45 years of experience in business, accounting, and audit, having served as a Senior Audit Partner at Deloitte. He holds certifications from the National Association of Corporate Directors and the Private Directors Association, with knowledge of private company governance and effective risk management. He has extensive knowledge in the financial services sector, including asset management and insurance. Herb is a member of MHM’s Audit Methodology Steering Committee.
Professional scepticism is an essential attribute of an auditor. It is “an attitude that includes a questioning mind and a critical assessment of audit evidence”. Professional scepticism allows auditors to effectively identify and assess risks of material misstatement, and to obtain and assess critically sufficient appropriate audit evidence to support their opinion on the financial statements.
Auditing standards include and emphasize the importance of professional scepticism, and the failure to exhibit the required level of professional scepticism has resulted in audit deficiencies being identified by regulators in their inspection process. For example, the PCAOB has often identified audit inspection deficiencies in its inspection reports related to professional scepticism, including the failure to identify and assess risks of material misstatement, perform sufficient audit procedures, obtain sufficient appropriate audit evidence, exercise professional scepticism throughout the audit, and properly document the audit work performed and the conclusions reached.
How does professional scepticism affect the auditor’s attitude, behaviour, and audit procedures?
Academic literature has established that we each have varying levels of professional scepticism. “Trait scepticism” refers to the stable personality characteristics that influence how sceptical an individual is in general, regardless of the situation. An auditor who has a high level of trait scepticism may be more likely to question the reliability of evidence and the honesty of management, while an auditor who has a low level of trait scepticism may be more trusting and accepting. We also react differently to situations depending on the audit context – the identified inherent risks, past history with the client, the tone at the top and culture of the client, and other external factors. This is referred to as “state scepticism”, a temporary psychological state. The interaction of trait and state scepticism defines how an auditor will react and behave.
Professional scepticism thus affects the auditor’s attitude, behaviour, and audit procedures in a number of ways. For example, an auditor with a sceptical attitude is more likely to ask questions, challenge management’s assertions, and investigate unusual circumstances, and is less likely to be complacent or to accept management’s assertions at face value. The question facing firms is whether scepticism can be enhanced, or strengthened, i.e., can a staff member with a low level of trait scepticism overcome this personality characteristic – and can staff members, in general, become more aware of situations that should increase their scepticism, increasing their level of state scepticism?
Where is professional scepticism most critical in a financial statement audit?
Professional scepticism is important throughout the audit process, but there are some areas where it is particularly critical. These areas include:
• Risk assessment. The auditor uses professional scepticism to identify and assess the risks of material misstatement due to error or fraud. This includes considering the entity’s industry, business model, and internal controls. Auditors must identify and assess the risks of material misstatement at the financial statement level, assertion level, and account balance level. • Performance of audit procedures. The auditor uses professional scepticism to design and perform audit procedures that are appropriate to the assessed risks of material misstatement and to use judgment to determine the nature, timing and extent of audit procedures necessary to obtain reasonable assurance that the financial statements are free from material misstatement. This may include obtaining additional audit evidence, performing more detailed tests, or challenging management’s assertions. • Evaluation of audit evidence. The auditor uses professional skepticism to critically assess audit evidence obtained. This includes considering the reliability, sufficiency, and relevance of the audit evidence. While professional scepticism is important in all areas and phases of an audit, there are some audit areas, generally involving estimates, that are often complex, involve significant judgment, and are susceptible to management bias, thus requiring a heightened level of professional scepticism. These include: • Revenue recognition. Revenue recognition is a complex area of accounting; there is a rebuttable presumption that it is also a fraud risk. Auditors need to be sceptical of management’s revenue recognition policies and to critically assess the evidence they obtain to support the recognition of revenue. • Inventory valuation. Auditors must conclude on the need for obsolescence and/or lower of cost or market reserves when auditing inventory valuation. • Impairment of assets. Impairment of assets such as property, goodwill and indefinite-lived intangibles requires judgment by management. Auditors need to be sceptical of management’s impairment assessments and critically assess evidence provided by management such as projections and valuation models. • Contingent liabilities. Contingent liabilities are potential liabilities that may or may not become actual liabilities in the future. Auditors need to be sceptical of management’s identification and disclosure of contingent liabilities. • Related party transactions. Related party transactions are often at the heart of earnings management and fraudulent financial reporting, and thus exhibit a higher level of inherent risk in accounting and disclosure. Auditors must be alert for undisclosed related parties and determine that they have been appropriately recorded and disclosed.
How can firms and auditors can enhance their professional scepticism?
Having discussed the nature and importance of professional scepticism, what can firms and individual auditors do to enhance professional scepticism? • Firms must foster a culture of professional scepticism and critical thinking, train staff to question assumptions, challenge assertions, and adopt a sceptical mindset when evaluating evidence, and provide guidance on evaluating management representations and addressing potential biases or conflicts of interest. • Firms should develop staff’s interviewing skills to effectively gather information and elicit relevant details during audits, and provide training on conducting interviews, including evidence collection and documentation. • Professionals must assess their own personal biases and blind spots and be honest about the potential for bias in their work and take steps to mitigate those biases. • Staff must be curious and ask challenging and difficult questions, be willing to probe deeper into management’s explanations, and ask potentially difficult and challenging follow-up questions. Auditors should always be asking themselves “Why?” and “What if?” • Staff members must perform audit procedures in a critical and objective manner and not merely go through the motions. They should, rather, critically evaluate audit evidence and make sound judgments (the “due care” requirement). • Professionals must be alert to red flags and conditions that may indicate possible misstatement. These red flags can include unusual transactions, changes in accounting policies, and management turnover. • Engagement teams must consider the client’s audit risk environment during the planning and execution of the audit engagement, including the tone at the top (i.e., entity level controls, including the culture of the organization), the client’s industry, the size of the client, and the client’s risk profile.
Conclusion
You cannot build a house without a strong foundation; you cannot perform a quality audit without a strong exercise of professional scepticism. While professional scepticism is very much influenced by individual characteristics of the auditor, firms must foster a culture that raises professionals’ awareness of their own biases and constraints affecting the exercise of professional scepticism. Audit quality is dependent on the abilities of auditors to question and critically assess – the very premise of professional scepticism. It must be embedded in everything we do on an audit – in all phases of the engagement and in all audit procedures performed, especially in those audit areas that are complex and subject to the potential of management bias.
If you want to speak to a Kreston Global audit professional, please get in touch.
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Kreston Global network welcomes new member firm in Nigeria
Sector:Finance
Kreston Global has welcomed Nigerian firm, Pedabo, to the Kreston Global network.
Founded in 1998 by Ajibade Fashina and Albert Folorunsho, Pedabo will mark its 25th anniversary in November with a rebrand to Kreston Pedabo, part of a strategy to extend its international services offering to a wide range of private and listed companies. Made up of 10 partners and 150 staff across three locations in Nigeria, the firm specialises in audit, assurance, tax compliance and advisory, financial advisory and risk management, management consulting and other support services.
The addition of Pedabo to Kreston Global’s network further strengthens its African regional presence, which consists of 30 member firms across 29 countries providing a range of financial, audit and accounting, taxation and other advisory services to businesses exploring inbound and outbound growth opportunities.
From left to right: Ajibade Fashina (Managing Partner), Kehinde Folorunsho (Tax Partner), Killian Khanoba (Snr. Tax Partner), Olubunmi Kuteyi (Tax Partner), Albert Folorunsho (Managing Consultant) and Peter Asemah (Audit Partner)
Liza Robbins, Chief Executive of Kreston Global, said:
“Pedabo has built an exceptional reputation in the Nigerian tax, audit and advisory landscape over the past 25 years. The breadth and depth of their expertise make them a trusted business partner for inbound and outbound clients. We look forward to working with them to build their standing in the international market, forging links across the network and beyond. They will be a great asset to our network and our African firms are extremely excited to be working with them.”
“Pedabo is indeed excited to begin this new phase; as founding partners, Albert and I are elated and proud of the progress that we have made in building the Pedabo we see today having truly established a Legacy of Excellence, but we are even more enthusiastic about the next 25 years and the new leadership that will take the firm to new heights with the Kreston brand. The choice of Kreston was not one that was made lightly, and we intend to establish a truly successful collaboration as we explore the Pedabo future leveraging the strengths and opportunities of the 13th largest accountancy network worldwide. So… Hearty cheers to Pedabo and on to the next 25 years of excellence on a global scale!”
Ajibade Fashina (Managing Partner), Albert Folorunsho (Tax Partner)
To learn more about doing business in Nigeria, click here.
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Herbert M. Chain
Shareholder, Mayer Hoffman McCann P.C. Deputy Technical Director, Global Audit Group, Kreston Global
Herbert M. Chain is a highly experienced auditor and is a financial expert with over 45 years of experience in business, accounting, and audit, having served as a Senior Audit Partner at Deloitte. He holds certifications from the National Association of Corporate Directors and the Private Directors Association, with knowledge of private company governance and effective risk management. He has extensive knowledge in the financial services sector, including asset management and insurance. Herb is a member of MHM’s Audit Methodology Steering Committee.
What is Information Provided by the Entity and what should auditors consider?
September 27, 2023
External auditors often have questions about what constitutes Information Provided by the Entity (IPE), and when and how the IPE should be tested. They must determine when a piece of evidence is IPE and then, if so, whether the evidence should be tested as IPE in connection with our auditing procedures. As a result, a “frequently asked questions” document might be helpful.
Understanding Information Provided by the Entity (IPE)
According to professional standards throughout the world, auditors must consider three fundamental attributes when evaluating audit evidence: sufficiency, relevance, and reliability. These criteria are outlined in the professional standards issued by authoritative bodies such as the American Institute of Certified Public Accountants (AICPA), the Public Company Accounting Oversight Board (PCAOB), and the International Auditing and Assurance Standards Board (IAASB).
Sufficiency, relevance, and reliability of audit evidence
Sufficiency: Sufficiency refers to the quantity of audit evidence obtained. Auditors need to gather enough evidence to support their conclusions and opinions. For example, the U.S. Generally Accepted Auditing Standards (GAAS) emphasize the importance of obtaining “sufficient appropriate audit evidence” to provide a reasonable basis for forming an opinion on the financial statements.
Relevance: Relevance is the pertinence of the evidence to the audit objective. Auditors should focus on collecting evidence that is directly related to the assertions being tested. Irrelevant evidence may not contribute to reaching the appropriate audit conclusion.
Reliability: Reliable evidence is trustworthy and dependable. Professional standards emphasize the importance of obtaining evidence that is reliable, which means it is accurate, complete, verifiable, and unbiased.
Reliability is especially critical when evaluating information produced (or provided) by the company (entity). PCAOB AS 1105.10, Audit Evidence, for example, states that “[w]hen using information produced by the company as audit evidence, the auditor should evaluate whether the information is sufficient and appropriate for purposes of the audit by performing procedures to:
Test the accuracy and completeness of the information, or test the controls over the accuracy and completeness of that information; and
Evaluate whether the information is sufficiently precise and detailed for purposes of the audit.”
FAQs about Information Provided by the Entity (IPE)
What is “Information Provided by the Entity” (IPE)?
IPE refers to information provided by the audited entity to auditors during an audit, and often serves as evidential matter for the auditor. IPE can be defined as any information provided by the entity using the entity’s IT applications, end-user computing tools, or other means. It is used by management, in either electronic or printed form in the performance of financial reporting, including in the performance internal control procedures, and by external auditors in performing their audit procedures.
Can IPE include non-financial information?
Yes, IPE can encompass both financial and non-financial information relevant to the audit, and is often used in substantive analytical procedures to develop expectations, e.g., number of rooms when auditing revenues for a hotel or shipping statistics when auditing revenues of a manufacturer, or number of employees when auditing salaried expense. (See question no. 8, below.)
What is the relationship between IPE and audit evidence?
IPE is one component of the evidence auditors obtain during the course of audit work. IPE is the information provided by the entity, while audit evidence includes all the information used by auditors to support their conclusions.
Are system-generated reports from service organisations considered IPE?
Service organizations are considered to be a component of a company’s accounting system and financial reporting process. Accordingly, reports produced by a service organisation and used for auditor testing must be tested for accuracy and completeness. This may be accomplished by obtaining and analyzing a SOC 1 Type 2 (or ISAE 3402) report for the service organisation, or by subjecting the reports to accuracy and completeness testing.
Is a bank statement IPE?
While auditors generally obtain bank statements from management, bank statements, executed contracts, etc. are not considered IPE; rather, they are considered to be source documents. If we are directly auditing the information by looking to another source of evidence, the IPE does not need to be tested.
Does all IPE need to be tested?
IPE is required to be tested for completeness and accuracy when relying on the IPE as audit evidence or it is being used to select or identify audit evidence. The audit evidence being relied upon must be evaluated to assess the completeness and accuracy of any IPE identified.
IPE which represents the population that is the subject of a specific audit test does not need to be further tested as IPE. In other words, if a population itself is the subject of sampling procedures or substantive analytical procedures designed to test the accuracy of the population itself, additional tests of the IPE are not necessary (e.g., confirmation of accounts receivable balances).
Does the source of the IPE make a difference as to whether testing is required?
Regardless of whether management provides audit evidence in the form of a manually-built Excel spreadsheet, a system-generated Excel spreadsheet, a system-generated PDF document, or a report generated by the company’s service organization, the auditor is required to test the completeness and accuracy of that report, either substantively or through a test of internal controls.
What is an example of the use of IPE?
IPE is often used for developing expectations for substantive analytical procedures or for auditing management’s estimates. For example:
Accounts receivable ageing reports are often used to compare the age of receivables from the current year to the prior year and to test the allowance for doubtful accounts;
Payroll reports can be used to derive full-time equivalents (FTEs) for salary testing; or
Inventory reports can be used to determine inventory turnover or other inventory metrics to test inventory obsolescence reserves.
When using IPE to establish an expectation, the completeness and accuracy of the IPE is required to be tested.
How do auditors assess the reliability of IPE?
The reliability of evidence is generally affected by accuracy, completeness, authenticity, and susceptibility to management bias. The reliability of information produced by the entity (IPE) depends on the completeness and accuracy of the information included in the IPE.
PCAOB AS 2305.16 states, “Before using the results obtained from substantive analytical procedures, the auditor should either test the design and operating effectiveness of controls over financial information used in the substantive analytical procedures or perform other procedures to support the completeness and accuracy of the underlying information”.
The auditor may test the controls over the completeness and accuracy of the IPE or elect to substantively test the IPE itself by testing completeness by selecting a sample from the report to test for accuracy. In some circumstances, evidence relating to the accuracy of information may be obtained from other audit procedures.
What sampling methodologies can be used to test IPE substantively?
The appropriate sampling methodology for testing the accuracy of IPE would depend on the specific circumstances and the audit objectives. One methodology is attribute sampling. Attribute sampling is designed to assess the occurrence or non-occurrence of a particular attribute within a population of IPE.
Conclusion
Obtaining and assessing the sufficiency relevance and reliability of audit evidence is a fundamental component of audit work and professional responsibilities. IPE constitutes a significant piece of the puzzle and needs to be analyzed and examined for accuracy and completeness if auditors are to use it as a basis for testing.
If you would like to speak to an specialist, please get in touch.
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Theo Theodoulou
Chair of Kreston Global Audit Group and Audit and Assurance Director at Kreston Ioannou and Theodoulou
Theo is a non-executive board member of the Cyprus Securities and Exchange Commission (CySEC), and leads the Audit Committee of CySEC. In 2018, he was appointed as the Finance Director of one of the biggest football clubs in Cyprus, Anorthosis Famagusta (Football) Public Limited.
Theo’s portfolio covers M&A due diligence, investment appraisals, forensic audit, internal audit and risk management advice, as well as corporate governance best practice.
Addressing audit delays
September 19, 2023
Audit delays are hitting the headlines. Kreston Global Audit Group Chair, Theo Theodoulou speaks to Accountancy Age about how staffing and lack of resource is affecting the sector.
The mounting concern over audit delays
Recent incidents of high-profile companies like Superdry failing to publish their accounts on time have brought the issue of audit delays into sharp focus. With multiple sectors affected, industry experts are calling for immediate action to address this growing crisis. According to a report in Accountancy Age, staffing problems, remote work complications, and economic volatility are among the main culprits.
A string of incidents
Superdry suspended share trading in August, citing delays in account publication due to extended procedures. And it’s not an isolated incident. In 2022, Go-Ahead also halted its shares due to audit-related issues. M&C Saatchi faced similar setbacks in 2020. Such instances demonstrate that audit delays are becoming a worrying pattern in the business world.
Staffing pressures
Theo Theodoulou, Kreston Global Audit Group Chair, points out that although each delayed financial report has its specific underlying causes, common industry-wide issues are contributing to the problem. “General weaknesses at the moment are the significant lack of audit resources, the pressure from regulators to enhance quality, and the turbulence in the markets,” said Theodoulou in his comments to Accountancy Age. “A combination of these factors will impact the completion of the audit work in a timely manner.”
He adds that high inflation, interest rates, and future forecasting uncertainties are causing fewer firms to retain their audit status. This, in turn, increases workloads for auditing firms, a situation further exacerbated by recruitment challenges at both senior and junior levels.
Remote work and staffing struggles
Research in 2022 by Broadbean Technology showed a 36% drop in the number of applicants for audit and accountancy positions between June 2021 and June 2022. Vipul Sheth, MD of accountancy and audit services provider AdvanceTrack, suggests that remote work models are contributing to these staffing struggles by impeding skill development and productivity. “Younger staff don’t have experienced colleagues to learn from in a remote setting,” he noted.
Technical barriers and solutions
Beyond staffing and economic issues, technical problems also play a significant role in causing audit delays. Paulo Andrade, a lead consultant at finance software provider Aurum Solutions, points out that data accessibility and transaction complexities can substantially hinder the audit process. However, Andrade argues that ongoing training and technology adoption can help overcome these challenges.
Future-proofing the audit process
For Theo Theodoulou, the solution lies in better planning and embracing technology. “Increasing use of technology, supported by artificial intelligence, will improve efficiencies and support auditors in times where we see a lack of audit resources,” Theodoulou suggested.
Mike Suffield of ACCA argue that a focus on audit quality should never be compromised for the sake of timeliness, the growing crisis of audit delays calls for a multi-pronged approach to reform. This involves tackling staffing issues, leveraging technology, and maintaining the human aspect of auditing that ensures both timeliness and quality.
If you would like to speak to an expert about your audit obligations, please get in touch.
News
Herbert M. Chain
Shareholder, Mayer Hoffman McCann P.C. Deputy Technical Director, Global Audit Group, Kreston Global
Herbert M. Chain is a highly experienced auditor and is a financial expert with over 45 years of experience in business, accounting, and audit, having served as a Senior Audit Partner at Deloitte. He holds certifications from the National Association of Corporate Directors and the Private Directors Association, with knowledge of private company governance and effective risk management. He has extensive knowledge in the financial services sector, including asset management and insurance.
How audit companies can support staff to better detect financial fraud
August 18, 2023
Recently, Herbert M Chain, Deputy Technical Director at Kreston Global Audit Group and Shareholder at Mayer Hoffman McCann P.C. spoke to Bloomberg Tax about a holistic approach audit companies must employ to support staff to identify financial fraud effectively. Read the full article or the summary below.
Increasing risk in the audit process
Recent data from the Public Company Accounting Oversight Board in the U.S underscores the correlation between firm culture and audit quality. The study highlights an alarming increase in audit deficiencies, set to climb for a second consecutive year. A significant 40% of these deficiencies in 2022 are linked to cultural aspects such as leadership’s commitment to superior audits, compliance, and staff churn.
At its essence, the culture of a firm serves as an unseen guiding hand, setting the tone for behavioural norms, professional duties, and interpersonal interactions. A perfect alignment of culture, values, processes, and training is imperative to empower auditors to address potential fraud risks.
In the world of auditing, ensuring that professionals are adept at pinpointing and addressing financial fraud is multifaceted. At its core, each auditor works within a framework of professional standards, controls, and strategies tailored to spot and react to fraudulent financial statements. This system—rooted in the culture of the auditing firm—is a cornerstone of the company’s quality control mechanism.
Auditor toolkit to reduce deficiencies
Scepticism as a daily practice
For auditors, embracing professional scepticism is non-negotiable. It emphasises a probing mindset and a scrupulous assessment of audit evidence—key to recognizing and countering potential fraud risks. Auditors, in every step of the process, are expected by regulators, stakeholders, and the public to apply this scepticism.
Auditors with sharp scepticism are not just passive observers. They actively hunt for signs of fraud and methodically inspect every piece of evidence. Their scepticism also helps in assessing managerial responses, ensuring they are not only rational but also evidence-backed. Both intrinsic scepticism and context-driven scepticism shape an auditor’s approach.
Elevating this sense of scepticism through training, awareness programs, and supervision can significantly enhance the trustworthiness of financial audit reports.
Financial Auditing vs. Forensic Auditing
Drawing a line between financial statement auditing and forensic auditing is imperative. While the former is designed to offer an unbiased opinion on the authenticity of financial records, the latter digs deep into suspicions of fraud for legal documentation.
Auditors in financial audits maintain impartiality, while forensic auditors operate under a presumption of potential misconduct. It’s a delicate act for auditors to maintain objectivity, yet remain alert to discrepancies.
Nurturing staff expertise
“Due care” is a revered principle in auditing, defining the expertise and diligence auditors should bring to the table. For auditors to be effective, they need expertise, awareness, and adequate oversight—this means entrusting complex evaluations to seasoned professionals rather than novices.
Cultivating a culture that champions learning is vital for auditors to counter financial fraud risks. Academic research supports the idea that well-trained auditors, equipped with fraud detection knowledge, are more sceptical, employ advanced methods, and stand a higher chance of identifying deceit.
When developing training programs, audit firms should:
Promote scepticism and analytical thought: Cultivate a culture that values scepticism and analytical thought. Train auditors to challenge assumptions and view evidence with a discerning eye. Offer guidance on how to scrutinize managerial claims and navigate potential biases.
Raise fraud awareness: Educate auditors about different fraud tactics, warning signals, and potential indicators.
Impart forensic accounting skills: Introduce staff to specialized fraud detection and prevention tools and techniques.
Teach control assessment: Instruct auditors on how to spot control vulnerabilities that may elevate fraud risks.
Enhance interview and enquiry skills: Train staff to extract vital details during fraud discussions and guide them on the intricacies of fraud investigations.
Encourage continued learning: Push for ongoing learning in fraud detection and encourage acquiring certifications, attending seminars, or workshops related to fraud.
Embracing Technological Advances
With technology evolving rapidly, auditors can no longer afford to be on the sidelines. Forensic data tools are increasingly finding their place in the auditor’s arsenal, especially in cases with high fraud concerns. Similarly, AI-powered systems, like expansive language models, are being harnessed to spot and analyze potential fraud.
Turning a blind eye to these developments is perilous. It’s imperative for firms to integrate these tools into their strategy and train their team accordingly.
Mastering data analytics is crucial. By scrutinizing transactional data, algorithms can pinpoint anomalies like unforeseen revenue fluctuations or dubious transactions. Alongside this, auditors need a grasp on data visualization, statistical techniques, and data mining.
The power of AI can’t be ignored. AI can process vast data amounts, spot patterns, and offer invaluable insights. It’s essential for auditors to have a robust understanding of AI technologies. But, it’s also vital to be aware of its limitations, ensuring AI is used judiciously and its outcomes critically examined.
Get in touch
If you would like to talk to an Audit expert about Audit, please get in touch.
D.med Healthcare is a privately owned healthcare company, headquartered in Düsseldorf, Germany, and operating globally in over 20 countries as a provider of medical services and products with a focus on renal care, diabetes, and other aspects of medical care.
Our Swiss audit and assurance firm, Kreston a&o, led by Emre Özdemir, assisted D.med in managing and accurately disclosing financial information across their extensive network of subsidiaries worldwide.
Thanks to Kreston a&o’s experience in managing a number of multinational organisations, Emre and the team were able to ensure accurate financial data reporting across the organisation. Through the implementation of efficient structures and processes, and working closely with many stakeholders, as well as legal compliance requirements, this complex assignment was delivered on time and has built a strong foundation for long-term success.
“I have had the utmost pleasure of a nine-year collaboration with Mr. Emre Özdemir and the audit team at Kreston, and I am thrilled to express my deep appreciation for their exceptional services. As D.med Healthcare Group navigated the challenges of maintaining transparency, accuracy, and compliance within our unique international setup, Kreston provided invaluable insights that compelled us to adopt a proactive approach to internal controls. Their thorough evaluation of our financial statements during the annual audits instilled trust and confidence in our stakeholders, while ensuring compliance with all legal and regulatory requirements.”
Aleksandra Uzunovska, Accounting Director, D. Med
News
Herb Chain
Shareholder, Mayer Hoffman McCann P.C. Deputy Technical Director, Global Audit Group, Kreston Global
Herb is a highly experienced auditor and is a financial expert with over 45 years of experience in business, accounting, and audit, having served as a Senior Audit Partner at Deloitte. He holds certifications from the National Association of Corporate Directors and the Private Directors Association, with knowledge of private company governance and effective risk management. He has extensive knowledge in the financial services sector, including asset management and insurance.
Auditor role in financial statement fraud prevention
August 1, 2023
Auditors have a significant role in financial statement fraud prevention. Herbert M Chain, Deputy Technical Director at Kreston Global Audit Group and Shareholder at Mayer Hoffman McCann P.C. in the US, believes auditors serve as the sentinels, ensuring the accuracy and fairness of financial statements for regulators, stakeholders, and the public. He recently shared his thoughts with Bloomberg Tax. Read the full article here, or the summary below.
What is the financial impact of fraudulent activities?
Financial fraud remains a pervasive menace to the global economy, causing substantial damage to businesses and the economy. As noted by the Association of Certified Fraud Examiners, financial statement fraud, while being the least frequent (at 9%), was the most expensive source of financial damage in 2022, with a median loss of $593,000.
Financial statement fraud isn’t just about misrepresenting earnings or misappropriating assets. It can also be driven by attempts to manage tax liability, with parties distorting their income through manipulation, misrepresentation, or evasion to shrink their tax responsibilities. This correlation between tax reporting and financial statement fraud emphasises the necessity for robust internal controls, thorough auditing practices, and vigorous regulatory oversight.
What are the professional responsibilities of external auditors?
External auditors carry the weighty responsibility of identifying and responding to the risk of significant misstatement in financial statements due to fraud. Professional standards such as the American Institute of Certified Public Accountants AU-C Section 240 and the International Standard on Auditing 240 guide the responsibilities of auditors.
Though regional and terminology differences may exist, these standards largely define financial statement fraud as intentional acts that lead to significant misstatements in financial statements or misappropriation of assets. They underline the need for auditors to maintain professional scepticism, exercise sound judgment, and obtain sufficient evidence to ensure that financial statements are free from material misstatements caused by fraud or error.
The auditor’s toolkit: Mitigating fraud risk
To effectively counter fraud at the audit engagement level, auditors must familiarise themselves with tools like the fraud triangle, which helps assess fraud risks. This conceptual framework, developed by criminologist Donald R. Cressey, considers three key elements that could increase fraud risk: incentive/pressure, opportunity, and rationalisation/attitude.
However, strong internal controls can be bypassed or overridden by management, leading to material misstatements in financial statements. To address this risk, auditors must understand the control environment, assess the design and implementation of internal controls, analyse journal entries, accounting policies, and adjustments, and incorporate unpredictability into the audit procedures.
Encouraging team engagement to detect fraud
One of the key tactics to identify and respond to fraud risks is to encourage brainstorming sessions within the engagement team. These discussions facilitate the sharing of knowledge, experiences, and insights, and allow for the development of staff members.
The engagement team must prepare before the sessions, encourage open discussions, emphasise the need for professional scepticism, focus on unusual transactions, and document and follow up on all identified fraud risks and related audit procedures.
In this ever-evolving financial landscape, it is our duty as auditors to uphold the integrity of financial reporting, thus contributing to a stable economy and instilling trust in external stakeholders.
Speak to us about fraud prevention
If you would like to know more about how audit can help your company prevent fraud, please get in touch.
Herb is a highly experienced auditor and is a financial expert with over 45 years of experience in business, accounting, and audit, having served as a Senior Audit Partner at Deloitte. He holds certifications from the National Association of Corporate Directors and the Private Directors Association, with knowledge of private company governance and effective risk management. He has extensive knowledge in the financial services sector, including asset management and insurance.
Ricardo is a fraud, audit and risk expert with over two decades at Ernst & Young (EY), where he served as an Audit and Forensics Partner across Canada, Chile, and Argentina. He led major clients in utilities, retail, manufacturing, and mining sectors, including Coca-Cola, McDonald’s, Siemens, Fluor Daniels, and others. Ricardo is a Certified Public Accountant (CPA) in the United States, Chile, and Argentina, a Certified Fraud Examiner (CFE), and holds an MBA designation. He’s also a university professor at Universidad de los Andes and a published author on occupational fraud.
Why mid-tier networks are a compelling alternative to the Big Four for audit
More companies are considering mid-tier networks for audit, shifting away from the long-established dominance of the Big Four audit firms. Herbert M. Chain, Deputy Technical Director, Global Audit Group and Ricardo Gameroff, Kreston Global Audit Business Director, shed light on this development in the latest edition of International Accounting Bulletin. Read the full article here or the summary below.
Why are companies switching from Big Four to mid-tier audit firms?
There’s a renewed interest in the mid-tier networks to carry out audits, due to regulatory pressures and concerns over conflicts of interest within the Big Four. The shift is also fuelled by the desire for greater competition, personalised service, and an alternative approach to audit delivery. These factors create substantial opportunities for smaller networks to serve companies previously in the portfolio of the Big Four.
What advantages do mid-tier networks offer when competing against the Big Four to audit companies?
The shift to mid-tier firms like Kreston Global is due to several key advantages they offer over their larger counterparts:
Client-centric service: Mid-tier firms devote more time and effort to understand their clients’ businesses, providing personalised advice tailored to their specific needs.
Cost-effectiveness: These firms offer more cost-friendly solutions, a compelling factor for clients looking to lower their audit fees.
Regulatory factors: Policies proposed by the EU and UK favour mid-tier audit firms, encouraging them to collaborate with the Big Four and giving them increased access to larger clients.
Quality of service: Mid-tier firms can offer more bespoke and specialized services, which can lead to a deeper understanding of the clients’ operations, resulting in a more comprehensive audit approach.
What challenges do mid-tier networks face when competing with the Big Four?
Despite these advantages, mid-tier firms face significant challenges when competing with the Big Four:
Brand recognition: The Big Four have a formidable reputation that is challenging to match.
Resources: The Big Four’s extensive resources in workforce, technology, research, and training are hard to rival.
Global presence: Mid-tier firms find it challenging to match the Big Four’s extensive global reach.
Service consistency: The Big Four’s consistent high-quality service across jurisdictions can be hard for mid-tier firms to replicate.
Regulatory compliance: The Big Four’s robust compliance programs and resources can give clients more confidence and security.
Talent acquisition: The Big Four’s reputation as top-tier employers can make it more challenging for mid-tier firms to attract and retain top talent.
What strategies are mid-tier networks using to compete with the Big Four?
Mid-tier firms are developing effective strategies to compete with the Big Four:
Client-focused service: Mid-tier firms focus on delivering bespoke client service, building stronger relationships with clients.
Specialisation: By focusing on specific industries or niches, mid-tier firms are differentiating themselves from their competitors.
Flexibility: Mid-tier firms can quickly adapt to new audit methodologies, showing greater flexibility in their service delivery.
Innovation: Mid-tier firms are investing in cutting-edge technology to improve the efficiency and efficacy of their audits.
Global reach: Through international alliances, mid-tier firms can match the Big Four’s global coverage.
What is the future outlook for the global audit market?
Mid-tier networks’ future will be shaped by their ability to adapt to market dynamics, leverage technology, and deliver high-quality, specialised services that meet clients’ evolving needs. With the global accounting firms’ market expected to grow at a CAGR of 12.60% from 2022-2030, these firms are uniquely poised to seize this opportunity.
Find a firm
Are you interested in discovering the advantages of a mid-tier network carrying out an audit for your company? Contact your nearest firm to find out more.
Kreston Reeves strengthens Private Client legal team with two new solicitors
July 24, 2023
Accountants, business, and wealth advisers Kreston Reeves has strengthened its Private Client Legal team with two new solicitors.
Jenn Trussler joins from Irwin Mitchell and Lily Parisi joins from Sussex law firm GWCA Solicitors. Both bring to the firm experience and expertise in advising individuals and families on Wills, Powers of Attorney, Probate and Estate Administration, Inheritance Tax and Trusts.
The 10-strong legal team at Kreston Reeves works alongside its tax and private client tax wealth management teams providing individuals and families with the advice and support needed to navigate an increasingly complex world.
Simon Levine, Partner and Joint Head of the Legal Services team at Kreston Reeves said: “Our clients increasingly need a holistic view when managing their personal affairs, and Kreston Reeves with its combination of legal, tax and wealth planning provides the perfect solution. It is at the heart of our purpose to guide our clients, colleagues and communities to a brighter future.
“We are delighted to announce the appointments of Jenn and Lily and look forward to the contributions they will make as they build and develop their careers at Kreston Reeves.”
News
The Netherlands and Serbia member firms announce partnership
Wouter Morsink, Partner Audit & Assurance at Lentink De Jonge Accountants & Adviseurs, commented, ‘Today we signed an exclusive partnership agreement with Kreston MDM in which we will work together within our Kreston Global network in the field of audit and assurance related services. An important part of the partnership is the support from Kreston MDM on national and international audit assignments. In addition, Lentink De Jonge Accountants & Adviseurs will support Kreston MDM in further developing data analytical technologies, for example using PowerBI. By cooperating with our partner in Belgrade, we can broaden the capacity in the Dutch audit practice, but also show that working together between Kreston Global members is not limited by borders. We at Lentink De Jonge Accountants & Adviseurs are very pleased with the partnership! Many thanks to our leaders Sebastian Stavorinus, Danny van Otichem and Jelena Mihic Munjic and Ivana Stolic. We are looking forward working together!’
By joining forces, these firms not only expand their own capabilities but also demonstrate the power of cross-border cooperation within the Kreston Global network. Such partnerships foster innovation, enhance expertise, and ultimately deliver greater value to clients and stakeholders. Together, they pave the way for a future where collaboration knows no boundaries, enabling industry-wide advancements and transformative outcomes.
Click here to learn more about doing business in the Netherlands or Serbia.
News
Evolution not revolution: Audit and adapting to change
July 11, 2023
Andrew Gragnani, President of MHM, shares insights on the topic of audit and adapting to change. He provides a comprehensive perspective on the developments impacting the sector, offering a glimpse into the future of MHM and how the firm is tackling some of the challenges and developments facing the accounting profession in the United States.
Audit and adapting to change: The evolution of AI
The use of Artificial Intelligence in accounting is a current hot topic hitting the headlines, with PwC recently investing $1 billion in AI technology over the next three years to deliver efficiencies, with plans to train 65,000 staff in AI technology usage and deployment.
When the discussion turned to the role of AI and audit adapting to change, Andrew offered a more cautious approach to AI. He believes the technology is still evolving at a pace that needs consideration,
“We have provided guidance to our personnel on the use of ChatGPT in that it is currently not a reliable source of audit evidence and cannot be used as such.”
However, MHM actively evaluates emerging technologies through its representation on CBIZ’s technology committee. Andrew explains,
“Rob McGillen, as the CBIZ Chief Innovation Officer, is responsible for handling various aspects related to new and emerging technologies, including AI. The committee continues to evaluate these technologies and how they can be utilised effectively to serve our clients. This evaluation is part of the ongoing process as the role of technology in the profession continues to evolve and develop.”
ESG and audit
ESG reporting is another new global development that has had the accounting industry working furiously to put regulation and policy into practice. Andrew emphasises the importance of distinguishing between the non attest standpoint and the attestation standpoint when it comes to ESG reporting.
“When we talk about the ESG implications, it’s important to separate non attest services versus attest. From an attestation standpoint, there is no one set of reporting standards that currently exists and verification of reports or standards is rare in the U.S. In addition, the political landscape is daunting, with 18 states forming an alliance against ESG which has created uncertainty for many outside the United States. For example, Lloyds of London recently exited the Net Zero Insurance Alliance due to the U.S. political landscape and anti-trust concerns. So, from an attestation standpoint, it presents a dilemma for deploying capital and resources.
The AICPA has announced they will be developing an attestation reporting framework, to better assist firms and its clients. We acknowledge that regulatory efforts will have a significant impact on the accounting profession, particularly in the realm of ESG reporting. However, as the rules and guidance regarding transparency, accountability, and reporting are still evolving, we remain in a state of observation, so that we can provide meaningful guidance to our people, and assist clients in meeting their reporting requirements.”
However, whilst policy and regulation continue to progress in the US, MHM will be focused on ensuring clients who do business in countries that have significant ESG developments meet requirements. Andrew is sensitive to the speed at which the issue is unravelling in real-time in other countries,
“We believe that preparing our clients who are material subsidiaries of EU entities for ESG will be important. So far, we’ve only received a couple of enquiries from clients who meet that criteria. In fiscal 2022, our public company practice represented about 4% of our firm’s total revenue so we have not seen much of a need and that could change when regulations change, but currently, it is impacting clients of the Big Four much more acutely than our client base.”
Meeting demand
He expects MHM to experience good growth in the next 12 months, but it is no secret that the industry is facing a shortage of skilled professionals to meet client demand. MHM has approached this challenge by outsourcing to meet increasing demand, stating,
“Through May of this year, we have experienced same unit revenue growth of 9.2%, which is outstanding, particularly in this U.S economic environment. In 2022, we saw a significant increase in the number of clients over $100,000 in attest fees, and these clients represented about 54% of our total revenue. Clients of this size provide significant opportunities, because they are generally more complex and require other services. Because of our growth and the shortage of personnel, we have implemented and are utilizing an offshoring solution in India.”
Andrew acknowledges the challenges faced during implementation but expresses confidence in the value and support they can provide.
“We believe our partner provides value and support to our firm and we’re confident in the quality they can provide.” He further emphasises the firm’s plan to expand outsourcing efforts, saying, “We plan to expand its usage to support our growth.”
Similar to Andrew’s approach to the evolution of MHM in 2023 and beyond, MHM’s unique blend of cautiousness and progressiveness is reflected in its almost 70-year history, creating a compelling alternative to the Big Four, particularly for small and medium-sized enterprises (SMEs).
Humble beginnings
From its humble beginnings as a small, single-location accounting firm in 1954, MHM has experienced remarkable growth and development based on that formula, now with 34 locations spanning the country and ranking (together with CBIZ) as the 11th largest accounting firm in the US market terms of turnover has created a winning formula, ready for a future with continued success and expansion
If you would like advice on any of these changes to the audit industry, please get in touch.
News
Olena Nikolaieva of Kreston Ukraine Elected to the Board of the Audit Chamber of Ukraine
June 30, 2023
Kreston Global is pleased to share that Olena Nikolaieva, Director of Quality at Kreston Ukraine, has been elected to the Board of the Audit Chamber of Ukraine. This notable achievement was announced at the regular Congress of Auditors held in Kyiv on June 24, 2023.
Role of the Board of the Audit Chamber of Ukraine
The Audit Chamber of Ukraine is a self-regulatory organisation that oversees the national auditing profession. The Board plays a crucial role in maintaining and enhancing the standards of auditors’ professional activity, ensuring their independence, and promoting the development of the audit profession in Ukraine.
The Importance of Auditing in Ukraine
In the current challenging times, the auditing profession remains a key pillar of financial stability in Ukraine. The role of auditors in ensuring the reliability of financial statements is essential for both Ukrainian society and those who support the country.
Kreston Ukraine Audit’s Vision for the Future
Olena’s election to the Board is a great example of Kreston Ukraine’s ongoing commitment to the development of the auditing profession in Ukraine and contributing to the growth and integrity of the profession.
We congratulate Olena Nikolaieva on her new position and acknowledge her exceptional work in the field of auditing. Her dedication to upholding professional standards sets a valuable example, and we look forward to her contributions in her new role.
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