There is a âculture of fearâ in audit that prevents junior auditors from speaking out, says a new report from the Institute for Public Policy Research (IPPR).
The report âRemaking Audit: A plan for culture change and regulatory reformâ claims that long working hours and a high-pressure environment both help to discourage junior auditors from raising any concerns they might have about the work they are doing.
Many of those starting out on their audit careers in the accountancy firms also fear what âbeing difficultâ will do to their careers.
The IPPR report says junior auditors need to be actively trained to speak up and raise concerns with the audit senior. The idea is to openly discuss failures. There must also be clear timelines to feedback the outcomes to any issues junior staff raise.
Shreya Nanda (pictured), IPPR economist and co-author of the first report in this series, said: âAudit firms should openly discuss past cases of audit failure, and routinely analyse their root causes with new joiners. To this day, NASA analyses the root causes of the explosion of the Challenger spacecraft as part of the induction for new staff. To prevent another Carillion, audit firms should learn from NASA, and do just the same.
âWe need to bring the audit industry into the 21st century by stepping up regulatory oversight and ensuring that, among other much-needed change, the failings of its internal culture are also addressed.â
The authors of the report say a complete culture change within the UKâs audit industry is needed to ensure that other crucial reforms fully restore public trust in the system.
Without a new approach that encourages challenge to clients and speaking up within the audit firms themselves, there is a real risk that past mistakes will be repeated.
Culture change within the industry, including the dominant âbig fourâ audit firms, should not be treated as an afterthought but should be rigorously prioritised, defined, put into effect and tracked.
The IPPR paper, the second in a series of three, comes as the government is considering reforms to the industry, proposed in its recent white paper. IPPR argues that auditors should be set a renewed public purpose of becoming a trusted referee of business so that audit is far more than a âtick-box exerciseâ.
That means stablishing confidence in audit firmsâ ability to detect and warn of fraud, financial misstatements and problematic accounting practices, and to live up to the same standards in audit-related consulting activity. This is crucial if the industry is to be trusted with a broadened role, also advocated by IPPR: to report on the quality of business governance, environmental risk reporting, and data and cyber governance.
With this in mind the report calls for a series of key changes across the industry including:
- Cleanly separate the audit and consultancy arms of audit firms, to end potential conflicts of interest.
- Establish a new audit regulator, the Audit, Reporting and Governance agency (ARGA), with a larger staff and better resourced than the current Financial Reporting Council. This should set a regulatory framework for delivering a strong ethical culture in audit firms, similar to that in place for financial services.
- Establish an ethical standard not just for auditors but also or consultancy services, to ensure their practices are aligned with the public interest.
- Overhaul accounting rules to ensure businesses cannot pay out more than they actually earn to shareholders (a common practice), and are less able to make rosy forecasts of profits.
- Overhaul the ethical culture in audit firms, with the regulator regularly assessing the progressfirms are making towards implementing it.
On internal culture, it calls for measures to develop an atmosphere of purpose, challenge and excellence with steps such as:
- Reform partner compensation so that it rewards audit quality rather than adjacent commercial aims.
- Celebrate courage and promote auditors who challenge clients, whether or not this results in immediate financial reward for the audit firm.
Train to improve decision-making, raising awareness of âgrey areasâ and âslippery slopesâ that could ultimately lead to audit failure.- Build institutional memory by openly discussing cases of audit failure, in the same way that NASA analyses the causes of the 1986 Challenger spacecraft explosion as part of its induction process for new employees.
- Reduce pressure on and encourageâspeak upâ by junior auditors – they are often the first to encounter difficult issues during audit projects but time pressure creates a strong incentive not to report an irregularity.
- Conduct regular reviews of culture in audit firms, learning from the similar practice in financial services, with partners held responsible for the culture within their teams.
Carsten Jung, IPPR senior economist and lead author, said: âAuditors need to define and articulate a purpose beyond profit, and put it into action -otherwise they will breed cynicism in their workforce. They should see their role as doing the detective work on businesses that society needs to ensure that they are run responsibly, with the wider public interest in mind.
âCareer incentives within the audit industry are too reliant on giving good news rather than flagging potentially bad news early on. Audit firms need to be given a clear public purpose of comprehensively challenging businesses where challenge is needed. To achieve this, itâs vital to put culture change at the heart of the revamp of the audit industry.â
