The UK Auditing Profession: A Student's Critical Evaluation

The Role of Auditing and its Agents

In a recent round table discussion amongst undergraduate travel and tourism management students, one commented as follows:

The UK auditing profession is failing in its role, and I'm disappointed that the UK government has not done anything to help maintain confidence in the external audit function. Apparently, a company's directors and auditors both act as agents when they carry out their respective roles! I don't understand why the company needs more than one agent - but if it does, well may be that's the problem. Could it be, that as agents representing the same company, with similar responsibilities in ensuring that the company's financial statements are correct, they trust each other far too much? If this is the case then it's a major problem, the relationship is just too cosy and the regulators don't care.

Doubtless, the whole audit process would be improved if both directors and auditors approached the audit with total distrust in each other. Company stakeholders can no longer rely on the various financial statement assertions, made by auditors, confirming that a company's financial statements are correct. Auditors' main objective is to make a profit, and this is wrong given the assurance role they perform. There should be some form of standardisation of the work they have to carry out and the way they do it ( after all, all audits are the same ! ); and to ensure they are being effective when carrying out their work, auditors should be forced to meet minimum quality standards. Further, shareholders should have some way of knowing whether the auditors have carried out their role to the required standard , and there should be regulatory requirements in place to check the standard of their work. Finding out, after a company has gone bankrupt, that its auditors were negligent when auditing the company's most recent financial statements, is of no use to anyone.

I really struggle to understand the role of a company's internal auditors as compared to it's external auditors. Why does it need two sets of auditors, you wouldn't expect a company to employ two sets of professional advisers to provide any other service - for example in respect of legal matters (solicitors ) or employee diversity matters ( human resource consultants )?. I've been told that when they carry out their work, external auditors will always rely on work carried out by a company's internal audit function - so again, why not save money and employ just one set of auditors ? Given the high number of audit firms available in the UK, to audit UK FTSE 350 companies, it's fair to assert that a company's audit committee should accept blame where a poor auditor has failed in his / her duty to detect a complex fraud perpetrated against the company - which having paid an extortionate audit fee, then fails as a consequence of the fraud. The committee's only there to carry out adequate due diligence procedures when appointing the auditor, negotiating a fair audit fee, and checking the audit work carried out to help ensure an effective audit. So you have to ask "was the audit committee asleep at the
wheel?" when company's fail in such circumstances!

Summing up , I have say that I think the external audit exercise in the UK seems to be nothing more than a convenient arrangement between a company's directors, its auditors and the regulators of the auditing profession, by which they all keep their jobs and security of income, at the expense of the company's shareholders and society at large. Particularly disconcerting is that I don’t think that I'm alone in thinking this , but the UK government just isn't interested in changing the status quo. Maybe, we in the UK should learn from the earlier "audit failures " in the USA, and the consequent legislation
introduced in 2002 to quell fraudulent actions by directors and improve the independence of external auditors." 

Critically evaluate the comments made by the student.

Note that you are required to display cogent knowledge and analysis of the issues raised in the commentary, but also the ability to critically comment on the merits and shortcomings of the arguments put forward by the student, about the current status of the auditing profession, corporate issues and suggestions for improvement. Where appropriate, you should cite authoritative sources to support your submissions. Maximum word count - main body of text excluding headings and references is 2500 (plus 20 % extension tolerated - if required,  you MUST show the total word count at the end of your essay.