Current levels of fraud and corruption in South Africa have resulted in calls for greater transparency and accountability by businesses. Transparency reporting is an opportunity for audit firms to demonstrate their commitment to audit quality
Transparency reports issued by audit firms to assist stakeholders in understanding how the systems of the firm are functioning can be likened to medical reports.
The history of transparency reporting
The production of a transparency report is mandatory for certain audit firms in the European Union (since 2006), Australia and New Zealand (since 2013), the United Kingdom (since 2008) and Japan (since 2008), among others. The requirement typically applies to those firms that audit public interest entities (PIEs).
Transparency reports are also issued, on a voluntary basis, in some other regions, including here in South Africa.
The purpose of transparency reports
The world is awash with an interest in transparency and accountability. This, some say, is triggered by the ailing political and business environments in some countries. With the pervasive disease of fraud and corruption in South Africa, there is a corresponding move toward greater transparency and accountability by businesses. Businesses, including audit firms, are keener than ever to show a healthy scorecard, that they are free of illness, and have healed any injuries.
Transparency reporting is an opportunity for audit firms to reflect on their audit quality (their fitness level) and report on the processes to achieve audit quality (health). With current exceptionally high levels of public scrutiny of audit firms in South Africa, voluntarily preparing transparency reports can indicate to the public the introspection and diagnosis that the firm has undergone in order to improve on its wellness.
Additionally, with mandatory audit firm rotation and audit tenure disclosure requirements now in place, an increase in audit tendering is expected. Audit committees will now be faced with making a selection of an audit firm on a more regular basis. There is a danger that in procurement processes, audit committees focus on price to the exclusion of quality. Transparency reports can play an important role in preventing the commoditisation of the audit by encouraging audit committees to look at and compare more than just price of the tendering firms. With transparency reports in place, the audit committee will be able to compare practices of competing firms, assessing the state of the various organs within the firm’s systems, and thereby determining the fitness of the firm to perform a high quality audit engagement.
Key elements of transparency reports
Transparency reports contain information on the systems of the firm, such as the firm’s:
- Legal and governance structure
- Measures to foster audit quality, and quality monitoring and remedial systems
- Network structures
- Financial information, for example revenue from assurance and non-assurance services
- Continuing professional education policy
- Basis for remuneration of the firm’s partners or the company’s directors
- Policy concerning the rotation of key audit partners and staff
- Independence practices
- External review results
- The PIEs for which the firm has carried out statutory audits during the preceding financial year, and
- The firm’s internal indicators of audit quality.
The IRBA is currently undertaking a separate project on the firm’s internal audit quality indicators (AQIs). AQIs are qualitative or quantitative thermometers, or measures, of audit quality (for example measures such as the extent of training undertaken per person in the assurance practice, and internal or external investigation results) which allow a stakeholder to assess and compare these indicators year-on-year and across firms. In the United Kingdom, six of the largest audit firms voluntarily disclose AQIs.
Requirements for South Africa
Transparency reporting is currently voluntary in South Africa. Where transparency reports are prepared, it is usually by firms that audit European Union PIEs. Where reports have not been prepared, this may be as the relevant information is incorporated into the global firm’s report.
ISQC 1 being revised
The International Auditing and Assurance Standards Board’s (IAASB) International Standard on Quality Control (ISQC) 1, Quality Control for Firms that Perform Audits and Reviews of Financial Statements, and Other Assurance and Related Services Engagements, issued in 2009, is undergoing revision. It is anticipated that the revised ISQC 1 will refer to the communicating of information about the firm’s system of quality management to parties external to the firm, as appropriate, taking into consideration factors such as the communication requirements set out in law, regulation or professional standards. This may provide the framework for the IRBA to make the publication of transparency reports mandatory. Reports could be required for the public, audit committees, or only for the regulator. The proposed ISQC 1 (Revised) is expected to be issued on exposure during 2018.
The following high-level observations were made on performing a check-up of the most recent local and international audit transparency reports:
- There appears to be an increased focus on transparency of client acceptance and retention processes.
- Transformation (in the South African context), diversity and inclusiveness are emphasised.
- Tone at the top, values, firm culture and independence practices are accentuated more by some firms than by others.
- A thread of commitment to audit quality, together with the tools and processes to make this sustainable, is found in all the reports.
- One international firm included a list of risks that the firm faces, with activities to manage and monitor the risks. As proposed ISQC 1 (Revised) is to be structured in the format of quality objectives, quality risks and responses to quality risks identified for each component of the system of quality management, this may be a model upon which to base the format of the transparency report.
- An extended commentary was provided by the CEO and assurance leader of a local firm, expanding on the firm’s response to the South African environment. Of interest here is that the firm explicitly disclosed its process to identify high risk entities that have been affected by the South African state and business capture situation, and its response about doing business with any of these entities.
The specialist suggests that there could be more on:
- Root cause analysis on internal and external review findings
- AQIs − these are disclosed in the UK (LLP) transparency reports, but not in the South African ones
- Technology and its impact on audit
- Non-audit services
- Reporting on performance against key performance indicators for assessing the effectiveness of quality control processes
- Incentives and remuneration in relation to KPIs
While transparency reporting is still voluntary in South Africa, in other jurisdictions it is mandatory for certain audit firms. As such, voluntarily preparing transparency reports could indicate to the public the introspection and diagnosis the firm has undergone to improve its systems. Until such time as transparency reporting becomes mandatory in South Africa, audit firms are strongly encouraged to prepare these reports.
Ciara Craul Reintjes CA(SA), RA, Senior Professional Manager: Standards, Independent Regulatory Board for Auditors (IRBA).
This article was originally published in the August 2018 issue of ASA.