Auditing is a serious occupation with severe consequences, if it fails. Audit failure is not uncommon. Even in India, which had a reasonably comfortable climate for auditors, the weather now is inclement. Larger firms have always confronted the perils of this profession. But smaller and growing firms will face newer challenges if they are unable to defend their opinions. But there are plenty of opportunities for these firms if the quality of their work can stand the test of scrutiny and review.
Quality in everything that you do in an audit is not an accident. Is audit quality determined by the size of the firm? This is always the debate when smaller audit firms bid for large audit clients. But larger firms do not have to answer such questions and they invariably command and get astronomical fees.
The economic viability of many of these smaller firms precariously hangs on the right mix of talents in the firm, especially with lower fee levels (compared to the larger firms). Many of the smaller and medium sized audit firms significantly leverage their pool of articled clerks who by statutory regulations have to do compulsory internship with a practicing accountant. This strategy brings down the firm’s average blended resource cost per hour. This leveraging of the student community is also done by the larger firms. So a typical audit team also have a number of green horns.
Is there a dearth of a robust Audit Review Process in small and medium sized firms? Is it that reason why big firms score higher points and higher fees? How serious is it?
We set out to find out what the reality is and in that process interviewed a number of professionals in these firms. Initially they were very reluctant to admit that the review process in general is weak but there was this lurking desire in them to do some honest introspection. Once the discussions got evocative and less intimidating, there were honest and cautious admissions once we agreed that we will not publish their names. Throughout, the whole discussions there was never a sign of denial. The question is also whether there is a dearth of appropriate review skills in these firms. How can one develop review skills if one is busy doing field work, doesn’t have time and is also not trained to do so?
A striking sign of a firm’s success is its ability to handle work with speed and skill. Paying clients are demanding and a growing firm has to bring a balance between speed and quality. At its core, an audit involves delivering a professional opinion based on sufficient audit evidence and objective judgments.
The principal drivers of audit quality are
• The quality of the audit itself, including a robust review regime
• The overall cultural environment in the audit firm
• The personal qualities and skills of the audit partners and the staff
An audit entails considerable amount of field work and the teams have to gather adequate audit evidence. The quality of the evidence and it appropriateness in the context of every audit is a subject matter of serious analysis, examination, evaluation and assessment. In short, what the profession calls a “serious and robust review”.
Review skills and a serious review process is the hallmark of a successful and growing firm that takes risk management seriously. When substantial amount of field work (which are of a routine nature) is executed by junior and relatively inexperienced staff, the supervisory and managerial staff have to spend time and efforts on the review of work performed by the junior staff. Larger firms build a pyramid of resources so that they are able to maintain an online real-time quality review process (rather than do a postmortem review) of their audit plans, its approach, execution, work papers and performing analytical procedures, all before the audit reports are signed and released to the public.
Smaller firms that are also growing do not have that luxury and some are even not conscious that their organisations are more than flat. In such firms with fewer people, the senior partners also roll up their sleeves and execute field work.Recruiting skilled staff in anticipation of newer clients is not a risk that they are willing to assume. The problems for the smaller firms become more complex if there is high levels of staff attrition. These infirmities of the smaller and medium sized firms seriously impair and impact their review processes and review skills. So review is more often than not a causality. We are sure that if the smaller firms honestly introspect on this, they will recognize this weakness. And this weakness is not only a risk, but a serious impediment to getting more work and growing the firm.
There is a perception that bigger audit firms have better review skills. This perceptions is not entirely wrong or misplaced. The review process and review skills are a function of the firm’s financial ability as well a work culture. In larger firms, the senior or the relatively not so junior a partner will not involve himself in any routine field work. He spends most of his time in directing, calibrating and constantly reviewing the audit work. He has a bunch of senior managers, then managers, assistant managers, executives (who are all qualified accountants) and then an army of junior staff, wannabe accountants. This is just the opposite in the smaller firms. A qualified accountant in these small firms is made a partner if he has a couple of years of experience. If he is not made a partner, he will happily move to a larger firm as a manager. In effect he is a glorified manager. So the senior partner in these small and medium firms have limited time to review and therefore limited review skills.
Can review skills be learned? Of course YES. It is all a matter of attitude. Small and medium sized firms should consider imbibing this ability to subject their work papers to certain minimum quality standard. They should do lateral recruitment’s of senior and experienced managers just to bring a robust file review process and a sense of seriousness and skepticism in the audit delivery process.
A structured Audit Methodology is in itself a strong process to bring into smaller firms a robust work paper culture and an effective review process to provide greater assurance and confidence to the entire audit delivery process.