Auditor Proud: Keeping up with changing expectations in audit

Garreth Hanley:
This is With Interest, a business, finance and accounting news podcast, brought to you by CPA Australia.

Dr Jane Rennie:
This is the new transcript: "Hello, and welcome to With Interest. We've reached an auspicious point in the accounting professional calendar, but it's one you might not be aware of, it's Auditor Proud Day. And so, in this episode, we're going to cover topics like the audit expectation gap, how auditors are responding to climate change, and what would happen to the economy if there weren't enough auditors? Joining me to provide the answers from CPA Australia is senior manager Audit & Assurance, Ram Subramanian. Welcome to With Interest, Ram.

Ram Subramanian:
Thank you, Jane. It's a pleasure.

Dr Jane Rennie:
Well, Ram, I hope you'll be impressed, but in preparing for today's podcast, I watched a video on the history of audit. And I learned that the audit function actually dates back to ancient Rome, when emperors appointed quaestors, who were sent to the provinces to ensure that the local governors were spending Rome's money appropriately. And also, of course, importantly, that taxes collected for Rome weren't being skimmed. But it wasn't until some 3,000 years later that Henry I coined the word audit. And like the Romans, he sent auditors to the corners of England to check how the barons were spending the exchequer's money, and again, to make sure taxes were being collected. Now, this sounds not dissimilar to audit today, at least at a superficial level. So, that got me wondering, is audit a profession that is largely unchanged from its roots? Sir Donald Bryden, who conducted the 2019 review into audit in the UK, stated about audit that, "Its core outputs have remained largely unchanged in the UK since 1947." So, Ram, do you agree with that statement? Is audit largely unchanged?

Ram Subramanian:
At the highest level of what an auditor is supposed to achieve, the answer is, yes, nothing has changed. Auditors are still entrusted with the critical job of providing credibility over corporate information, playing a large part in ensuring there is trust and confidence in the markets or corporate behaviour. But at a more nuanced level, the outputs from the audit profession have absolutely changed. On just financial audits alone, we now have a longer form audit report that provides more detail around the audit through the disclosure of key audit matters more than ever before. And then, we have auditors now focusing more and more on providing assurance on all sorts of non-financial corporate disclosures as well.

Dr Jane Rennie:
So, Ram, would it be fair to say the thing that has really changed and that has impacted on the audit profession is that the business landscape has changed? And the sorts of changes I'm thinking about are the explosion in competing information sources, the shifting priorities of investors towards environmental, social, and governance issues and increased regulatory oversight. It certainly does feel like some of those aspects have driven a significant expansion in the scope of the auditor's work. I wonder, how has the audit profession kept up with this increasing list of demands?

Ram Subramanian:
Well, I think the audit profession has done admirably well in keeping pace with the ever-increasing demands placed on it. Auditor competencies are much broader and much deeper than ever before. Whilst it's a fact that there are fewer auditors around than say a decade ago, the auditor of today is somewhat a super specialist, increasing their own knowledge and experience around the audit subject matter, using the work of both internal and external experts on specialised areas such as asset valuations, climate change, and also, the increasing role of technology are always by which the auditors have kept up with the increasing demands on the profession.

Dr Jane Rennie:
Now, I'm interested to hear you use the word super specialist because in the area, perhaps, of the risks posed by climate change, there's been increasing attention paid by regulators to that. And annual reports or separate corporate reports now often include, say, sustainability reports or climate-related disclosures. So, does that mean as auditors, as super specialists, really need to have sustainability-specific skills?

Ram Subramanian:
Yes is the simple answer. Sustainability-related practises and associated disclosures are now becoming an essential element of corporate governance. And the auditor's role is critical in adding that credibility to sustainability disclosures that the market wants. And auditors will have to be ready for when these disclosures become more commonplace.

Dr Jane Rennie:
Do you think there is a connection between the reality that you've just described and that need to be a super specialist, and what the public actually understands audit to include? Because I know there's been something termed an audit expectations gap. Perhaps, can you give me an explanation of what that actually means?

Ram Subramanian:
Well, the audit expectation gap is basically what the market thinks an auditor does and what the auditor actually does. Because the auditor is actually doing a sample-based testing of the subject matter, which is quite commonly the financial statements or the financial report. And they're using materiality levels and other things in doing that work. And the market sometimes think that the auditor goes far beyond and looks at much more detail into the company or the organisation that they're auditing. And that's not necessarily always the case.

Dr Jane Rennie:
Now, that's interesting that you say that the market might think or the public might think that what the auditor does goes to a much deeper level. Because actually, ahead of this podcast, we ran a little poll on LinkedIn to ask people about their understanding of the role of auditors. And specifically, we asked people to vote on what skills or tasks are not part of the role of the auditors. And we gave four options for what is not part of the role. This is how people voted. 7% said investigator was not part of the auditor's role, 22% said fraud-buster, 9% voted for communicator, and 62% voted for corporate police as not being part of the auditor's role. Do those results surprise you or do you think people got it right?

Ram Subramanian:
It's not surprising at all to me. I'm so glad that the people actually who voted on this poll got it right, actually. I'm glad there is actually recognition that an auditor is not expected to be a fraud deterrent, or indeed, seen as the corporate police. An auditor is a watch talk rather than a blood hound. They're not there to find every little wrongdoing or error that may occur within an organisation. Naturally, auditors are expected to be good communicators, so the poll results are good in that sense. The significant work undertaken as part of the audit process is distilled into an audit report that is, at the most, a page or two. So, no surprises there.

Dr Jane Rennie:
Well, Ram, are there any other things, perhaps any funny or unusual things that you're aware that people might think is part of the role of the auditor, but really isn't?

Ram Subramanian:
Yeah, this goes back to what I said earlier, and it also goes to some of the results that we got on the poll. The auditor is not there to police how an organisation runs. They're there to provide some credibility, very important and crucial credibility on the financial performance of the organisation. Nothing more, nothing less.

Dr Jane Rennie:
Well, I wanted to ask you next about the impact of technology on the audit profession. Things like artificial intelligence, data and analytics, next-gen software, and cognitive computing and more have all become part of the profession over the last few years. How do you see that technology has changed the nature of audit?

Ram Subramanian:
Well, technology is actually freeing up valuable auditor time to focus on higher-end tasks that require significant judgement , analysis and interpretation of the data. It is actually allowing auditors to visualise the audit subject matter better, and looking at the data in different ways and arriving at more robust conclusions, something that will not only improve audit efficiencies, but also audit quality.

Dr Jane Rennie:
Does that also change the value that auditors provide to their clients?

Ram Subramanian:
Absolutely, because what you're getting here is a richer data set, the ability to look deeper, and wider and providing better insights, not just into the audit itself, but also providing valuable information to the client, which can result in improvements on things like internal controls, financial management systems and processes. So, there is a win-win here, effectively.

Dr Jane Rennie:
Are there any types of technology that Australia's audit profession has yet to catch onto, but that you think it should? Or, alternatively, are there technologies that the audit profession in turn wants Australian businesses to embrace?

Ram Subramanian:
Yeah, that's quite an interesting question. Technology is getting more and more embedded into audit processes, probably more at the larger end of town. And as time progresses, we would very much like to see that same technology-based solutions being available to the smaller end of town. So, your SMSF audits and your not-for-profit audits, perhaps through off-the-shelf technology-based solutions, which are becoming more prevalent, but we would like to see more. There are things like blockchain, which is not yet fully embraced within the audit space.

It's an ideal technological solution that might lend itself to audits, but we are yet to see much more prevalent use of that technology within the audit space. Now, the other thing that's probably worth mentioning here is digital financial reporting. Now, Australia seems to be one of those few countries within at least the G20 which hasn't embraced digital financial reporting yet. Now, you might say digital financial reporting is more the reporting, rather than the audit itself, but once you have information available digitally, it should make the audit process more efficient and provide better results.

Jacqueline Blondell:
If you're enjoying this podcast, you should check out our in-depth business and finance show, INTHEBLACK. Search for INTHEBLACK on your favourite podcast app today. And now, back to With Interest.

Dr Jane Rennie:
We have been hearing from CPA Australia members that the skills shortage is at critical levels across the accounting profession. Ram, is this issue as pronounced in the audit space as it is for other disciplines, or is it less acute?

Ram Subramanian:
Although, the whole accounting profession has been hit with skill shortages, problem has been more acute for the audit profession in particular, we've had a drop in registered company audit numbers in Australia over the last 10 or so years, and that number continues to decline. So, there are some concerns there.

Dr Jane Rennie:
And offhand, how big do you estimate then the shortfall of auditors is?

Ram Subramanian:
Well, we used to have around 4,000 auditors about 10 years ago. I understand these are not numbers I can verify, but off the top of my head, I understand the numbers are closer to the 2,000 to 2,500 mark now, so quite a significant drop in registered company auditors. And we would like to see that number increase with more registered company auditors being added to that population.

Dr Jane Rennie:
And I'm guessing this is a global issue that the auditor shortage is affecting other countries around the world?

Ram Subramanian:
Yes, we are hearing this is a problem globally, also. Although, this is at this stage more anecdotal. As far as I'm aware, there's no actual research that has been undertaken to identify the exact numbers.

Dr Jane Rennie:
And that shortage of auditors is in fact having some interesting ripple effects. I know that for the last two years, ASIC has given unlisted entities a one-month extension for their annual report lodgements. And that's in recognition that companies have reduced resources due to staffing, among other challenges brought on by COVID-19. Ram, I find that to be quite extraordinary. Are we in danger of an audit shortage induced crisis in Australia's economy?

Ram Subramanian:
Well, based on the declining numbers of accountants who want to become auditors, unless the profession and the government come up with policies to address both the short-term and long-term shortfalls in auditor numbers, we could very well have a crisis on our hands. We are now expecting the audit profession to expand beyond traditional financial audits, and not only do we need more auditors going forward, the professional will also need to upskill on the assurance of non-financial metrics, including sustainability disclosures. So, yes, we do have a crisis unless we do something about it pretty soon.

Dr Jane Rennie:
So, higher demand for auditors and fewer auditors to do the work. What are the risks if we do reach that critical tipping point where there simply aren't enough auditors to do the work that's required?

Ram Subramanian:
Well, auditors provide that important verification of information that organisations produce, that users of that information rely on. And it is also information that is crucial to any well-run economy. And if that is missing, it could undermine market confidence, resulting in potential negative impacts on the economy as a whole.

Dr Jane Rennie:
Right. Well, now that we've established that auditors are pretty much essential to keeping things turning, I think we better talk about how we're going to attract a new generation of auditors. But forgive my ignorance, what is the typical pathway to becoming an auditor? Do you start out as an accountant and then decide, "Oh, audit sounds good," or do you select audit as your area from the very start?

Ram Subramanian:
Well, actually, you get both types. Those who start life as accountants or finance professionals indeed, and later on find out that audit is their calling and specialise in that. And then, you have those who start off with a clear focus on becoming auditors from the get-go. They know what they want. That is the profession they want to get into.

Dr Jane Rennie:
And where do most of them work? Is it only in accounting firms or are many embedded within businesses?

Ram Subramanian:
There's a wide range of auditors, actually. And those who work within the public practise space, there is actually quite a broad spectrum there as well. You've got auditors who work at the big end of town, undertaking listed-company audits and large-entity audits. And you've got auditors at the smaller end of town. You've got your SMSF auditors, you've got your not-for-profit auditors. And of course, you've got auditors in the public sector who play a vital role in making sure that the public sector remains accountable to its population.

Dr Jane Rennie:
Not to be crass, but how much does an auditor make in a year?

Ram Subramanian:
Well, as always, it actually depends is the answer. It really depends on the type of audit that an accountant gets into, whether they go into the public sector, whether they go into public practise. It depends on the size of firm that they enter, the types of audits that are undertaken. It also depends on the level of seniority as well. So, someone who comes in from, say, being an accountant for a number of years with a lot of experience in a particular field may come in at a higher level of salary compared to someone else who is just entering the profession after a short period of experience.

Dr Jane Rennie:
Well, Ram, how about to finish off, you give me a bit of an elevator pitch? What would you say to someone about why they should become an auditor?

Ram Subramanian:
Well, if you're someone who likes investigating things, has a very inquiring mind and an innate ability to exercise good judgement , if you have all these attributes, consider becoming an auditor because you will add enormous value to your employer, and like I said earlier, to the broader economy as well, and find a stimulating global and well-paid career.

Dr Jane Rennie:
That's all we've got time for today. Thank you very much to our guest expert, Ram Subramanian. With Interest is a weekly podcast. If you like what you've heard today, why not subscribe on your favourite podcast app? From all of us here at CPA Australia, thanks for listening.

Garreth Hanley:
You've been listening to With Interest, a CPA Australia podcast. If you've enjoyed this episode, help others discover With Interest by leaving us a review and sharing this episode with colleagues, clients, or anyone else interested in the latest finance, business and accounting news. To find out more about our other podcasts and CPA Australia, check the show notes for this episode. I hope you can join us again for another episode of With Interest.