PwC Australia has released a balanced scorecard on audit quality, the first for an Australian firm, including the firm’s individual ASIC audit inspection results along with other key measures of audit quality such as internal inspection findings, restatement rates and adjustments to financial statements.
Assurance Managing Partner, Matt Graham, said “Audits are a critical component of a trusted and well-functioning capital market, with many important decisions made based on the financial statements that companies release each year.”
“Many factors contribute to a quality audit and we believe a balanced scorecard approach will better inform the audit quality debate in Australia and how we can continue to improve the audit process.
“In recent months there have been increasing calls for ASIC to disclose individual firm’s audit inspection results, not just industry averages, as is done by audit regulators in other parts of the world.
“This is a position PwC supports and we are proud today to become the first firm in the country to publish a balanced scorecard which not only puts our ASIC audit inspection results on the public record, but also discloses how we’re performing against a range of other quality measures.
“We are aware that by committing to this level of transparency there may be times in the future when the results we publish don’t meet these expectations. Indeed, ASIC’s latest report identifies areas for further improvement for PwC and we have a specific Quality Improvement Plan to address them. Our ultimate goal is that ASIC considers that we have obtained reasonable assurance in all audit areas. We believe greater transparency will drive accountability, lead to better conversations across the market about audit quality and, ultimately, build trust.”
PwC’s audit quality balanced scorecard includes the following:
ASIC audit inspection findings: Based on ASIC’s most recent report (for the 18 months ended 30 June 2018) in 12% of the key audit areas that ASIC reviewed across PwC files, ASIC considered we did not obtain reasonable assurance that the financial report was free from material misstatement. This compares to 24% across the whole industry and 20% at the six largest firms in Australia.
PwC’s global audit inspections*: In the period between 2016-2018, no PwC Australia audits of publicly listed companies were rated as non-compliant with PwC’s guidelines and auditing standards. In 2018, our global inspections identified that five sample files of smaller, private companies were not compliant with PwC standards. In no instance did this involve an inappropriate opinion being issued, but instead a need for improvement in how the audit work was performed and documented. These findings have formed a key part of our Quality Improvement Plan.
Restatements**: In cases where audit findings were identified by ASIC or PwC internal inspections for public companies, between 2016 and 2018, there were no instances where the relevant financial statements needed to be restated to the market. This compares to an industry average of 4% based on ASIC’s financial reporting surveillance program of public companies.
Adjustments: Before a company publishes its financial statements, it may make adjustments, or clarify or enhance it disclosures, as a result of an audit. This is a critical and important part of a quality audit process. In 2018 PwC identified on average six adjustments to the financial statements of listed companies – and ensured their appropriate treatment – before they were finalised and published.
Non-audit services and independence: The Corporations Act prohibits several types of services from being performed for a client by its external auditor and PwC has comprehensive internal policies in place to ensure our independence is not impaired. The level of non-audit work at PwC audit clients in the ASX200 represents, on average, approximately 26% of audit fees over the past three years. This equates to less than 3% of total PwC Australia revenue in 2018.
According to Mr Graham, being more open around how the firm is performing against a range of measures, starts to paint a more detailed picture of what a quality audit entails.
“Whilst the regulator’s findings are a critical component of audit quality, and one we take very seriously, with their focus on the riskiest areas of public company audits they only represent a small percentage of the thousands of audits carried out in Australia each year.
“We hope this scorecard starts to provide a broader overview of what’s involved in an audit and how we’re performing against the appropriately high expectations set by the market, the regulator, our clients and our firm.”
According to Mr Graham, the scorecard is not only an opportunity to drive greater accountability for audit quality but also kickstart a broader discussion in the market on what makes a good quality audit.
“Expectations around what the audit could – and should – look like to better serve the interests of investors and the community more broadly are shifting rapidly. For example, should an audit look beyond historical financial information, does it need to include new levels of coverage such as fraud; and could it provide assurance over non-financial measures in a company’s annual report such as culture, controls and cybersecurity.
“We look forward to leading these conversations with our clients and other stakeholders at a critical time for the audit profession, ” Mr Graham says.