FMA shifts audit quality focus as new control standard kicks in

This article was current at the time of publication.

The number of non-compliant audit files found by the Financial Markets Authority’s (FMA) 2021-22 Audit Quality Monitoring Report has fallen below international levels, but some audit firms still lack sufficient documentation.

The latest review found only one departure from standards in the quality management systems (concerning independence) of sufficient significance to potentially affect audit quality across the audit firm level.

Just one of 20 files of audits performed by the Big Six firms on listed companies were non-compliant. 

In the previous review period, around one-third were non-compliant, although that was consistent with international results.

Room for audit improvement

Nonetheless, the regulator identified several areas for improvement, “notably in relation to auditors not documenting their work and the evidence to support their conclusions”.

“If there’s not enough documentation on file, we don’t know if there’s a problem, so it’s difficult to go deeper,” FMA Head of Auditing, Financial Reporting and Climate-Related Disclosures, Jacco Moison, says.

“But we’re now seeing better documentation.”

The report also identified audit procedures applied to going concerns as an area of focus.

“It’s fundamental to [whether] a business can continue in the future,” Moison says.

“There are areas for improvement. For example, auditors are assessing cash flow forecasts without assessing the evidence for them, such as growth or discounts rates.”

Revised quality control standard

According to Moison, the revised quality control standard with which audit firms must comply this month mostly concerns firms monitoring their own quality management procedures.

In other words, it requires firms to implement and document their monitoring in addition to their existing quality management systems.

However, to give firms time to comply, the FMA doesn’t intend to thoroughly review these systems during the 2022-23 cycle. 

Instead, the regulator will only focus on “whether the firm performed certain monitoring processes”.

Specific reviews of all firms’ implementation of the new standards will follow in 2023-24.

The FMA’s latest review zeroes in on the appropriateness of the identified root causes of shortcomings in audit reviews and whether remedial actions were sufficient to ensure issues didn’t reoccur.

“Going forward, we will place more emphasis on the process used to identify root causes and related remedial actions to ensure remedial plans are effective,” Moison says.

The report acknowledges that a shortage of experienced auditors is causing delays in audit completion.

FMA Acting Director of Capital Markets, Paul Gregory, says: “We expect the audit profession to increase its focus on creating a sustainable future that can resist disruptions, such as workforce shortages.”

Moison acknowledges that shortages are causing long hours and heavy workloads for some auditors.

“Our concern is that if there’s a lot of stress and pressure, mistakes can be made,” adds Moison. 

Climate reporting entities

The report also notes the imminent release by the External Reporting Board (XRB) of the first Aotearoa New Zealand Climate Standards, which will require around 200 Financial Market Conduct (FMC) reporting entities (to be known as climate reporting entities) to report their greenhouse gas emissions from 2024.

It notes that all its FMC reporting entities – regardless of whether they will be climate reporting entities – are already required by existing accounting standards to assess if climate change has an impact on their financial statements.

In October this year, FMA issued guidance on its expectations for disclosures on audit files about climate risks.

“Directors, senior managers, and auditors need to be aware of our expectations and the requirements of the climate-related disclosures regime,” Gregory says.

“If climate change impacts an entity, auditors need to consider whether the financial statements appropriately reflect this,” adds Gregory.

The Ministry of Business, Innovation and Employment is currently consulting on an assurance regime for the new standards, with submissions due 10 February 2023.

Issues include whether the regime will include assurance providers other than current FMA-overseen auditors, and how the quality of assurance these providers supply will be monitored.

Auditor shortages

The increasing scope and complexity of audit matters also feature in a list of several issues affecting the future sustainability of the audit profession discussed in the Auditor-General’s mid-term review, which was released last month.

“The most significant challenge facing the profession is a severe and enduring global shortage of auditors at a time when audit work is increasing in volume and complexity,” the review states.

It also notes “underlying vulnerabilities” affecting the profession, including “long-term issues with under-recovery of the costs of some audits,” “questions in the minds of investors and others about the value of an audit,” and “questions about whether auditors are truly independent”.