In this article we asked other connecting questions so that if this cannot be answered directly then we might succeed making this puzzle if we answer all the other ones.
This is a humble attempt to highlight an issue and no harm to any auditor or auditing as a profession is intended.
What’s confusing you now? Its not from “now” its been there for centuries!
- How do you tell if it is just a watch dog and not a blood hound?
- Do you really think that if watch dog doesn’t bite then trespasser will be afraid and stop being a miscreant?
- If it just have to watch then does he need to smell?
- If he is to smell as well how keen?
Are we just asking too many questions? Are we even supposed to ask ourselves such questions when standard is there? Why are we asking these questions? Whenever we start walking this path it just doesn’t seem to end logically.
Fraud is one wrong that is done the right way!
Fraud is what is concealed at best and fraud is what has been concealed. Now dilemma. At one hand you are not letting him investigate and on the other you are asking him to be diligent to detect it? How do you expect from him to unearth if he cannot investigate or he is not supposed to be investigative. Where does skepticism jurisdiction ends and from where investigation starts? Yes it will be said that he is required to be “reasonably” diligent? But how much reasonable is reasonable? Put yourself in the shoes of aggrieved party and ask how diligent you want an auditor to be? Would you accept an auditor to stay toothless and just not able to detect fraud because he is not a fraud examiner. I’m pretty sure you won’t go with skeptic face of auditor or do you?
Independence – How much auditor should be and how much he wants to be!
Let us ask ourselves another question do we really need to have things so clear should it not stay like this so that both management and auditors are held responsible every time or can we even clarify it completely or lets just call it another limitation of audit and make it part of x-files. Is it really a sting for auditors? Are they really serious in sorting this out?
We must ask are the auditors really independant? Auditor is required to be independant but can he?
In a world where customer is king what do you expect what auditors will do? Is this not a classical example of conflict of interest? Auditors need clients to audit and charge hefty audit fee. If they just go too strict are they not risking clients? History is full of examples that if one firm has pointed out fraud client never returned to such firm again. These confusions are just giving auditors more room to decide on their own i.e. when to be just a watch dog and when to become a blood hound.
It just feels like whenever auditors are asked these questions they tend to have confused mind whether they should be acting complete auditor or complete businessmen looking for clients to audit.
Another try – Who is responsible?
Well at least one thing is clear that primarily management is responsible. And that ignites another debate.
Whenever responsibility is shared it creates the same mess. A person is either responsible or not responsible due to same reason person is punishable or nonpunishable. And if you are just able to define responsibilities you will never be able to do fair trial.
If auditor is not responsible then why not have fraud examiner or forensic accountant do the job. And if he is responsible then what is the need of forensic accountants or fraud examiners. We just don’t know when you are auditor and when you are examiner.
Two of the main reasons why it is still a big confusion are:
- how reasonable reasonable assurance should be? Something reasonable might not be reasonable for another at all
- Auditor is not responsible to detect fraud but he is responsible to detect material misstatements caused by fraud and error. But how do you expect that he is able to detect material misstatements if he is actually not going to detect fraud?
In an article Martin Jones tried to make things clear out of the dust and described management as primarily responsible and auditor as secondary scout. Now remember standard clearly marked manager as primarily responsible but didn’t said anything about auditor to have secondary responsibility it is just an interpretation given by Martin Jones.
But again the question is what is the extent of secondary responsibility? Where does the secondary responsibility ends? And are we even able to divide responsibilities like primary and secondary all the time or we have to negotiate even on this in the engagement letter? One question we are not asking still is whether responsibility is limited or unlimited?
But if auditors are so generous to take up additional responsibility than no one is stopping them. But in reality things are not the same as so discussed wide and open in words such extended favours are just on paper and will stay there.
Expectation Vs Application
Its also a conflict of expectations and duties and they are just not on the same page.
The concept of auditing is not uniform. The one’s performing audit feel theirselves free of responsibility and the ones relying on their opinion believe that auditors are responsible. Have no idea whether this contention is intentional or we are just too lazy to clear out confusions. And that is the same reasons in real life auditors are just finding it hard to reconcile what they are taught and what actually users of financial statements require from them. And it is also observed in student life students are not taught about what is waiting for them in real world. While attending classes students are found to be too distant from realities. One possible remedy is that audit learning must be case study based rather then simple standard application based. That way we will get auditors and not simply applicators.
How good is standardization?
Standard only answers half the question i.e. why auditor might not detect fraud i.e. why he should be held responsible. But the other unanswered part is of greater importance i.e. to what extent he is required to detect fraud staying skeptic and for what he must be held responsible. It is not always the case that when you know about something by only knowing “what that something is not” especially in case laws you need to determine what that something really is. Main reason is the scope of staying skeptic is not clearly defined. Questioning mind is what? and to what extent inquiry is just skeptic and not investigative. Who is going to define the boundaries?
Inbuilt confusions in the standards is just making it even worse as they are giving air to differences only. No attempt to clearly define the boundaries of scope of audit has been made in the standard and not even any conceptual framework is there for auditors like accountants.
Future auditor = Auditing Standards in Human Form!
Students we are producing are so bookish that they never question whatever they are taught. And if someone get the guts to ask, all the others just start teaching the same thing to normalize the situation. Its like a standing pool of water that never does anything. They are just not ready to discuss anything. Tolerance to disagree is no more there.
In one event when students were asked:
- whether auditor is responsible? to detect fraud and they unanimously stated NO.
- Secondly when they were asked why? then majority said it is because the standard said so (surprisingly yes! although the latest standard ISA 240 is not of this stance anymore) and some were of the idea that he only needs to report and not to detect which is again not at par with the standard.
- But then a trick question if they are not responsible then why are they held liable in court for fraud? and that’s when the talk ended and the buzz started…
And that is one problem of standardization in ones opinion because many were fighting on the interpretation of the standard and not really thinking how to sort out the problem. They were just looking for help in a document written by humans for humans to deal with humanly problems and yet humans cannot think on their own at least for the sake of discussion.
We created the standards to rule out differences but now even bigger problem is arising that you are not even allowed to disagree and start thinking differently and this is probably one reason we lack youngsters that are afraid of initiative and outright creative and imaginative. In today’s world you have to be a rebel-defacto if you are asking questions.
This point forward…
I have uttered all this not just to ask questions but let fellow auditors and students to even start going in this direction. This article shouldn’t be taken as a pun rather it is an open SoS to masses a call to gather and collective effort to rule out confusions.
I know it is easy to ask only questions and by picky instead of giving answers and solutions. But I don’t want to be alone in answering all these questions. Lets just come together and start finding answers and I am sure we will find a solution to this. You can join the discussion in the comment section below
Views expressed are only of the author.