UK auditors advised to be extra sceptical when assessing firm accounts


British auditors have been advised by the UK trade watchdog to indicate better scepticism when assessing firm accounts within the wake of excessive profile company scandals.

The Financial Reporting Council on Thursday printed “professional judgment guidance” for accountants to enhance their strategy to auditing.

It has warned auditors that poor skilled judgment had turn into probably the most important points affecting the usual of their work within the UK.

As a part of the brand new steering, the FRC has flagged that skilled scepticism was “a key part of an appropriate auditor mindset, supporting the quality of judgments made on the engagement and, through these judgments, the overall effectiveness”.

It has set out plenty of ways in which auditors can higher strategy this as a mindset, in addition to particular sensible examples to be used. The FRC mentioned that this kind of “mindset” steering was the primary of its variety. It features a framework for making skilled judgments.

Andrew Likierman, professor of administration observe and former dean of the London Business School, mentioned the brand new steering would assist auditors “track down what has hitherto been that elusive animal — good professional judgment — [and] as a result keep them out of the wrong kind of headlines”.

He added that historically one of many predominant safeguards of audit high quality had been skilled scepticism. “Carillion and Patisserie Valerie are the most notorious, Galliard Try and Keir the most recent firms where the audit, one way or another, has gone wrong. This rightly encourages rigorous questioning of information provided by management.”

Mark Babington, the FRC’s government director of regulatory requirements, mentioned that skilled judgment was a “fundamental requirement for high quality audit”.

He added: “Unfortunately the FRC’s supervision and enforcement work regularly finds professional judgment has not been exercised effectively and consistently, undermining audit quality and trust in audited accounts.”

The steering focuses on the “mindset” of the auditor given the everyday “latitude for the individual or team making a professional judgment to decide on the appropriate approach in the circumstances”.

The new steering comes within the wake of a number of massive company scandals, together with bakery chain Patisserie Valerie and outsourcer Carillion.

The FRC is looking for to enhance the steering and guidelines governing audit though proposed laws to assist flip the group right into a more practical regulator have been solely included within the Queen’s Speech this yr in draft kind. This may delay the long-awaited plans even additional, with the brand new audit watchdog unlikely to be in place till after 2023.

The FRC mentioned that skilled judgment was wanted on a spread of necessary areas from danger evaluation, honest values and going concern to the interpretations of requirements and evaluation of proof.

It added that corporations that don’t use or contemplate this steering will must be ready to clarify how they’ve complied with the related engagement requirements.

Sotiris Kroustis, accomplice and head of public coverage at PwC UK, mentioned that skilled judgment was “subjective, complex and at the heart of what we do as auditors”.

He added: “This guidance is helpful not just for those undertaking audits, but for other parties involved in preparing financial statements, and we encourage it to be used constructively by all those involved in the financial reporting chain.”