At this time of year, most people around the world are looking forward to the holiday season and are filled with goodwill and best wishes. This is a time that we should fully enjoy. However, this is also the time when many of our RSM colleagues around the world have been planning and preparing to audit the financial statements of clients with December fiscal year ends. So, in this season filled with goodwill and peace, I find it necessary to remind us all of a topic that can be more uncomfortable for some people - ‘professional scepticism.’
Professional scepticism is at the heart of our profession and has recently drawn considerable attention from regulatory bodies around the world. Recently, for example, both the Australian Securities & Investments Commission (ASIC) and the US Public Company Accounting Oversight Board (PCAOB) have issued reports and documents containing criticism of auditors’ lack of professional scepticism. The audit profession has been entrusted to protect the public interest through the exercise of due professional care and without appropriate application of professional scepticism, auditors around the world face a real risk of losing the franchise that we have been given.
So what is professional scepticism and where is its application lacking? International Standards on Auditing define professional scepticism as “an attitude that includes a questioning mind, being alert to conditions which may indicate possible misstatement due to error or fraud, and a critical assessment of audit evidence.” Regulatory bodies regularly cite a lack of professional scepticism being applied in audits especially when auditors are dealing with significant management judgments or transactions outside the normal course of business, or when considering fraud risks. Additionally, at times auditors do not question thoroughly management’s reasons for selecting a particular accounting treatment for certain transactions, or do not consider carefully enough contradictory audit evidence that has been gathered through other audit procedures. Users of financial statements have placed trust in us, as auditors, to ask the tough questions of management and to demand logical explanations supported by other audit evidence.
In order to address deficiencies cited by regulators in the application of professional scepticism, a root cause analysis is required. What are some potential root causes leading to a lack of professional scepticism? Auditors need to be constantly aware of unconscious human biases that cause us to gather and evaluate information in a way that is consistent with client preferences rather than the interests of external users; that is, unconsciously we want to please the client and avoid conflict. Financially motivated root causes can include inappropriate pressure to keep audit fees low or incentives and pressures to build or maintain long-term audit relationships with clients. Lastly, we need to be aware of environmental causes such as scheduling and workload demands that put pressure on auditors to complete their work too quickly.
The first step in improving audit quality is awareness of the causes and symptoms of a lack of professional scepticism being applied. A rigorous system of quality control that emphasises professional scepticism and is supported with the proper tone at the top is critical to addressing regulator concerns in this area. Executing our audits with a healthy questioning mind and demanding no less than persuasive audit evidence does not need to create an adversarial role with our clients. As a matter of fact, good clients appreciate our professional responsibilities to discharge our work with due professional care.
When applied appropriately, the use of professional scepticism will result in external users continuing to place trust in us as auditors and our rightful place in the financial information supply chain will be ensured.
Global Leader - Quality & Risk at RSM Executive Office