Hear from our Global Chairman, Bob Moritz, as he addresses the external scrutiny of the audit profession in some markets around the world and speaks about how we are responding as an organisation (4:47).
The quality of our work is at the heart of our operations across the globe we invest very significant and increasing resources in its continuous enhancement across all of our businesses. We are also investing heavily in new technology to drive continuous improvement in the capabilities and effectiveness of our audits along with all our other businesses.
Delivering audits of the highest quality is core to our purpose. To that end, our firms are committed to providing a robust and effective audit supporting each of the thousands of audit reports that are signed by PwC. Much of our work is not visible to stakeholders. The inevitable focus of commentators on where an audit may have fallen short means that the numerous instances where adjustments have been made to accounts as a result of the audit process can be overlooked.
The commitment to quality is core to our assurance strategy, the focus of which is to strengthen trust and transparency in our clients, the capital markets and wider society.
To help our member firms put this strategy into effect, the PwC network has established clear objectives around audit quality and provides support to help our firms meet these objectives. Our member firms can only deliver audit services of the highest quality if they have access to the necessary capabilities – in their people and systems. That’s why our quality objectives focus on having the right capabilities – both at a territory level and across our network – and on using these capabilities to meet the valid expectations of our stakeholders.
The quality objectives each represent a capability that we believe is relevant to achieving and sustaining high audit quality. To help our member firms achieve these objectives, we also have a number of dedicated functions at a network level that develop practical tools, guidance and systems, supporting and monitoring audit quality across our network. We’ve now integrated and aligned all of these elements more closely – ranging from purpose to objectives to functions to tools – creating a comprehensive, holistic and interconnected quality management framework that’s being tailored and implemented by member firms across the PwC network.
An aircraft manufacturer’s end-to-end quality assurance and management systems are intended to ensure that a safe and reliable product is assembled on its production lines. Similarly our network quality management framework implemented by our member firms is designed to support the highest quality standards. Central to the framework are the checks and balances designed to ask if the right audit steps are taken at the appropriate time. For example, a well-planned audit is much more likely to be a high-quality audit: so our audit processes emphasise planning on a timely basis, including the allocation of the right resources. Similarly, our member firms need to ensure that the right leadership is in place promoting the right values that are fundamental to audit quality.
High audit quality requires more than just the right processes. At its core, an auditor’s role is to assess with a “reasonable” degree of assurance whether the financial statements prepared by the company’s management contain “material misstatements” – reaching a professional judgement on whether the financial statements present a fair picture of the company’s financial performance. To carry out this assessment effectively, the auditor needs to use all the capabilities that have been built up in line with our quality objectives. These include applying ethical behaviour in accordance with PwC’s values, professional scepticism, specialist skills and judgement – all supported by state-of-the-art technology.
A vital component of any high-quality audit is fulfilling the objectives and requirements of the applicable auditing and professional standards, such as independence and ethical requirements.
As part of our internal monitoring, we regularly perform independent reviews of a sample of completed audits to check whether the audit evidence gathered is sufficient and reliable and complies with the relevant standards. Between 2015 and 2018, we reviewed a total of 7,647 audits by member firms worldwide, and the findings are set out in the table below. 44% of those audits were ‘public interest entities’ (essentially listed and other significant companies) – and among these, we identified 190 instances of non-compliance with applicable auditing standards over the four years. Most of the instances of non-compliance that we identify do not involve inappropriate opinions being issued, but rather a need for improvement in how the audit work was performed and documented.
|Total audit engagement reviews||2018 - 1,890||2017 - 1,870||2016 - 1,977||2015 - 1,910|
|Compliant||2018 - 76.0%||2017 - 72.8%||2016 - 74.4%||2015 - 75.4%|
|Compliant with Review Matters||2018 - 16.2%||2017 - 18.4%||2016 - 18.9%||2015 - 18.3%|
|Compliant Engagements||2018 - 92.2%||2017 - 91.2%||2016 - 93.3%||2015 - 93.7%|
|# Non-Compliant Audits||2018 - 147||2017 - 164||2016 - 132||2015 - 120|
|% Non-Compliant Audits||2018 - 7.8%||2017 - 8.8%||2016 - 6.7%||2015 - 6.3%|
We continue to invest record amounts in improving audit quality. At a time of increasing stakeholder expectations, in 2017 we raised the bar for how we define a fully compliant audit. We are pleased that our efforts are bearing fruit: audits rated as non-compliant in internal and external reviews have decreased in the most recent data, but we remain committed to additional investment and actions needed to further improve quality.
We take all instances of non-compliance seriously, and each member firm acts to understand the circumstances which led to its quality objectives not being met, to identify the root cause of the problem and to make improvements to its controls, systems or approaches as needed to stop it happening again. Our member firms also reflect quality in the evaluation, reward and accountability of the relevant audit partners and leadership teams.
In addition to our internal review programme, our member firms are subject to monitoring and inspection by external regulators. Some 52 of these regulators are members of the International Forum of Independent Audit Regulators (IFIAR). IFIAR’s 2017 Survey, released in March 2018, reported on the results of inspections of audits of listed ‘public interest entities’ in nine leading audit jurisdictions worldwide by the six biggest global audit networks. It found that the regulators identified 30% of these audits as having a “finding” (which does not mean an audit is assessed as non-compliant) in 2017, down from 38% in 2016 and 39% in 2015. The equivalent figures for PwC audits in the same nine jurisdictions were 22% in 2017, 29% in 2016 and 33% in 2015.
As part of our network audit quality management framework, PwC’s member firms make significant investments in audit quality. This is targeted into many different areas, including technology, training (technical, ethical and behavioural), audit methodology and exploring new ways of delivering an audit. Each investment reflects a common determination to understand the factors that drive quality, to identify opportunities for improvement, and to make those enhancements promptly to prevent issues from recurring.
The depth and breadth of resources across our global network help our firms to understand different industry sectors and their emerging risks and challenges – in turn ideally positioning our firms to anticipate, identify and address audit problems. What’s more, our common standards provide a basis for regular and productive interactions with audit committees, Boards and regulators worldwide. And we are eager to keep engaging with others to share, listen and learn – while continuing to invest in improving the quality of every audit we undertake.