The Uncanny Business of Audit Compliance
During my graduation year, I was applying to various companies for interviews. My degree major was in Finance and Econometrics (aka statistics). I received a call to interview by one of the big 4 accounting firms – PricewaterhouseCoopers (PwC).
Guess what I told the person who called me?
“I’m sorry but I am not interested in accounting or audit jobs”
In the end, I went for the interview, got hired and spent close to 5 years on the job. It was in the Valuations team under the Corporate Finance function. NOT Audit.
Why was I against Audit?
I had a bit of trouble with the accounting subject in my studies. But above and beyond that, it was a gut feeling that told me “no”.
After 5 years in an Audit firm and then currently attached to another Audit firm – both times in the advisory department dealing with deal transactions (buy / sell / invest businesses) – I have an idea why it is not for me.
Now, don’t get me wrong.
Accounts and financial statements are actually useful tools in the context of investments and business. The thing that I don’t click with is the business of Audit.
The Failure of Audit
The concept of Audit is to ensure that the financial statements of the company are fair and are accurate representations of the company’s wellbeing. The company gets a stamp of approval that their reported numbers are correct.
But as we all know, that is often so far from the truth.
Over the last few years, Securities Commission’s Audit Oversight Board (AOB) has been actively looking into the Audit practices of Malaysian firms. They are the “police” of the Auditors of public listed companies in Malaysia.
This saw quite a few misconducts surfacing:
- 5 in 2020
- 11 in 2019
- 13 in 2018
This was also accompanied by various Audit firms deciding to drop from the Audit practice of public listed companies and so avoided the eyes, scrutiny and (ultimately) the sanctions of AOB.
If this can happen in public listed companies, imagine the extent of this happening in private companies’ Audits.
The bigger question, though, is why does it happen?
The Business of Audit
Maybe – for a small handful – it is due to mistake and oversight. But I have a different viewpoint.
Audit is a business, after all. A business in compliance is a tough business.
On the one hand, Auditors have regulators to worry about. They need to ensure that what they do are in line with what the “standards” (aka Audit law) says.
On the other hand, Auditors have to ensure that their clients are happy with the Audit in fear of clients moving to another firm.
If we follow the money, i.e. look at where the motivations lie (I covered this concept in a previous post here), we could then see that Auditors will happily assist clients to make full use of any loopholes. This translates to extra value to the clients.
*Due to obvious reasons, I will not discuss the why and how
In the absence of any “creative” accounting, Audit is a review work to make sure the accounts / financial statements are done correctly. As such, there is no significant difference between firm A and firm B, right?
This brings me to the next point about the value in the eyes of clients.
The Value of Audit
I got a question – “How much would you pay for compliance work?”
I’d reckon most will agree with “as low as possible”.
The reason is simple: It is not a service that we WANT, but MUST get due to regulatory requirements.
Hence, Auditors often face fierce competition when it comes to fees. The lesser fee of a job, the lesser the firm can commit resources to the job. This will increase the chance of any oversight, as well.
The chances of increasing fees year on year is also challenging because it might potentially cause the client to move to another firm with lower fees.
Hence, the best way to be able to increase Audit fees typically is to provide extra value to clients (refer to the section before this). The reward in increased fees should commensurate with the amount of “regulatory” risk they take.
This is more prevalent in the Audit of private companies as there are less regulatory scrutiny. Which is also why the Audit fees for public companies are higher and less competitive compared to the privates.
Closing Thoughts & The Future of Audit
Those are the reasons why I am unable to resonate with Audit work. It is also the same reason why we need to look between the lines when we analyse financials for our investments.
“Are the financials hiding anything?”
Audit work will continue to exist as long as there are businesses around and the same struggle will continue as well (business vs regulations).
The future of the Audit business, though, is for those who can incorporate technology – such as Robotic Process Automation (RPA) – and evolve the business away from the traditional Audit. This would inadvertently mean the decrease of Auditors required for the job.
However, this would not be able to take away the core dilemma of an Audit’s business and why we should never take financial statements as it is presented to us.
