An audit is broadly a process when a supposedly independent accountant is paid by a business' management to ascertain whether the accounts prepared by management are true and fair.
This simple, factual description encapsulates the fundamental failure of the audit profession. Accountants behave with no less probity than doctors signing off dodgy sick notes, or a lawyer conducting an exculpatory review of a busines boss' harassment of a junior member of staff. It's partially a matter of he who pays the piper chooses the tune; partially a matter of trying to achieve customer satisfaction. Challenging the interests of your own customers is bad for business.
There follows an unbroken litany of companies which have gone bankrupt, leaving creditors and shareholders out of pocket, with not even the merest squeak of warning from the auditors. Various tweaks to the format of the audit report, changes of name of the government regulator, and immense expansion of the auditing standards have had all the impact you would have expected them to have: none at all.
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Nowadays, very few accounts are 'signed off' by way of formal audit report. Currently, only a small class of larger companies require an a under company law. Audit reports are still required for a smattering of other regulatory and compliance clients including solicitor and estate agent client accounts, charities whose size exceeds a lower threshold than other companies. Professional accountants still sign an accountant's report, the gist of which is that the accountant takes no responsibility whatsoever for the accounts they prepare. Accountants are supposed not to be involved in accounts they believe are incorrect under their professional ethics rules.
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Part of the problem at the smaller end is the inherent fictions that auditing imposes on reporting accountants. Accountants must fastidiously document their client's systems as though they were dealing with a large corporate with a team of accountants who prepare their own accounts. The reality is more prosaic: clients generally keep reasonable bookkeeping records and rely on the auditors to comply with ever shifting changes in formal financial reporting. Even a successful, engaged and diligent businessman might squint quizzically when asked, as auditing standards require, about what process they followed in ascertaining the going concern status of the company (the correct answer, in case you are wondering, is a cashflow forecast extended 12 months from the date of the audit report) or what controls they have to ensure correct disclosure of deferred tax assets (that would be you guys, right?). Dishonesty is baked into the system. And so juniors on their first assignment learn the ropes from their seniors. If a client cannot find a requested invoice, delete the original test and replace it with an invoice that the client does have. Partners and managers play higher level games with that favourite plaything 'materiality'. Only a material misstatement needs to be corrected. But it is inappropriate to prepare accounts with immaterial errors. So errors such call below 'materiality' need to be specifically required to be left uncorrected by a client. The careful dance of performative independence and buck passing is inherent to the standards themselves.
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So what is the solution? Radicals might dismiss the value of audit altogether. Proponents claim that it is impossible to quantify the cases where nothing went wrong because the auditor intervened. They claim it would be a wild West without external valuation of the claims made by management in their accounts to investors. And they are probably right.
The first step must be to disaggregate formally the auditing standards applicable to larger public listed entities, and, say, a family owned chain of three restaurants. The difference is not just quantitative: it is qualitative and it is forcing auditors to shoehorn inappropriate concepts and misrepresent reality on reach and every small audit file.
One interesting concept is that of joint auditors. None are so performatively prim and proper as an accountant reviewing the work of another. I would tweak this concept slightly. It seems to me to make sense for one of the accountants to be the accountant - responsible for the financial reporting, and for greasing the wheels between the actual auditor and the client. This accountant would be bound by norms of professional behaviour but would make no pretense of independence. They would be management's advisors and be would be typically be engaged to assist on tax as well. The other would be the auditor, appointed at random from a regional pool, and very much not management's hired gun.
The audit report should be less formulaic and less devoted to defensive drivel about how pretty much of everything is management's fault. I propose a detailed factual account of what procedures were carried out and what the results were. No airy fairy conclusions on truth and fairness.
Finally the vexed issue of costs. What incentive would an auditor appointed at random have to keep costs down? I would look at a fixed cost per procedure carried out (£20 for invoice inspected, £150 for bank confirmations, £750 for attending stock takes?) and a dispute mechanism in case the need for procedures is disputed.
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