Audit firms’ challenges in 2024

As we usher in a new year, audit firms find themselves confronted by an array of challenges that demand resilience, innovation, and strategic adaptation. In this complex terrain, the challenges facing audit firms are not isolated incidents but an interconnected web that requires a strategic approach to ensure the continued trust and reliability of financial reporting. Here are five issues to watch out for in 2024.

Regulatory Compliance:

Audit firms navigate a highly regulated landscape, subject to stringent standards and requirements set forth by various regulatory bodies. Non-compliance with these regulations poses significant consequences, including the imposition of fines, sanctions, or even the revocation of licenses.

This regulatory environment witnessed an assertive shift in 2023, exemplified by the actions of the American regulator, the Public Company Accounting Oversight Board (PCAOB). Substantial penalties, nearing a total of $12 million, were imposed on prominent firms such as PwC, Deloitte, KPMG, and others. The PCAOB cited "failure to respond appropriately to audit evidence" as the basis for these penalties. Similarly, the Chinese regulator levied a $31 million fine against Deloitte, citing "auditing negligence."

Chairing the PCAOB, Erica Williams underscored the commitment to heightened enforcement activities, emphasizing the use of every available tool in their enforcement toolbox. Williams stated, "We will continue to use every tool in our enforcement toolbox to make sure people know that there are consequences for putting investors at risk." This escalating compliance risk places audit firms in a precarious position, compelling firm leadership to devise and implement strategies to effectively mitigate these regulatory risks. The imperative for strategic planning is evident, as regulatory scrutiny intensifies, underscoring the need for audit firms to proactively address and manage compliance risks to safeguard their operations and reputations.

Talent retention

Addressing workforce challenges remains a key concern for firms, and while the accounting profession is not unique in grappling with this issue, there are effective tools available to mitigate associated risks. From an HR perspective, one crucial tool is technology, and it's essential for firms to redefine their approach to technology as an integral part of their talent strategy.

Embracing technology-enabled auditing is particularly noteworthy. This approach equips firms with powerful tools to assess risks, identify anomalies, and detect fraud. It's important to note that these tools are not intended to replace professional judgment but rather to enhance it, allowing job roles to evolve and broaden. In essence, technology serves as a catalyst for career development that aligns with the strategic growth objectives of the firm.

Current workforce trends indicate that employees seek meaningful work experiences. Leveraging technology-enabled auditing procedures creates an opportunity for deeper client engagement, especially when investigating data outliers. Moreover, it frees up valuable employee time from routine entry-level tasks, presenting opportunities for more enriching responsibilities. This shift has the potential to enhance overall job satisfaction, aligning with the evolving expectations of today's workforce.

As firm leadership, it’s crucial to communicate the symbiotic relationship between technology and talent strategy within the organization. Positioning technology as an enabler rather than a replacement for human expertise can foster a positive work environment and contribute to the firm's long-term success.

Risk assessment challenges

The assessment of audit risk is a recurrent source of noncompliance, as evidenced by findings in firms monitoring results. Recognizing the challenges auditors face in certain aspects of risk assessment, particularly in the context of less-complex entities, the Auditing Standards Board acknowledges the need for enhanced guidance. In response, the Board has introduced scalability options to accommodate diverse entities and has provided clarification and enhancements to the identification and assessment of risks of material misstatement, ensuring alignment without fundamentally altering core principles.

The significance of risk assessment cannot be overstated in the context of financial statement audits. The long-standing notion of a "risk-based" auditing approach underscores its importance, directing audit efforts toward areas most susceptible to material misstatement. Consequently, during audit planning, the audit team engages in a thoughtful analysis, considering:

• The identification of areas presenting inherent risks,
• Evaluation of the magnitude of material misstatement threats associated with these risks, and
• Determination of appropriate audit procedures responsive to the assessed risk levels.

Auditors commonly encounter challenges in consistently applying relevant auditing standards, giving rise to key concerns in several areas, including:

• Ensuring the quality of linkages between risk assessment and response,
• Demonstrating and documenting the application of professional judgment, and
• Defining, determining, and understanding the concept of 'significant risk' as outlined in the International Standards on Auditing (ISAs).

In light of these challenges, firm leadership must recognize the need for ongoing efforts to foster a more consistent and effective application of risk assessment procedures within the audit profession. This acknowledgment emphasizes the importance of addressing these concerns proactively, promoting adherence to standards, and facilitating a robust and high-quality audit process across a spectrum of entities.

Quality control and professional skepticism

In auditing, maintaining the highest standards of quality control and fostering an unwavering commitment to professional skepticism are pivotal aspects that underscore the integrity and reliability of financial information, it creates the trust that clients value and expect. Two international standards, ISQM1 (International Standard on Quality Management 1) and ISQM2, play a crucial role in guiding audit firms towards achieving and sustaining audit quality.

ISQM1, titled "Quality Management for Firms that Perform Audits or Reviews of Financial Statements, or Other Assurance or Related Services Engagements," lays the groundwork for establishing and maintaining a robust system of quality management within audit firms. Emphasizing the importance of a proactive approach, ISQM1 outlines the fundamental principles that underpin effective quality control.

Professional skepticism is the cornerstone of an auditor's mindset, ensuring a critical and questioning approach throughout the audit process. ISQM2, titled "International Standard on Quality Management 2, Engagement Quality Reviews," specifically addresses the role of professional skepticism in maintaining and enhancing audit quality. Audit quality control and professional skepticism are not isolated concepts but rather complementary pillars that uphold the integrity of the audit profession.

The risk assessment process is to be designed and implemented as part of the firm’s system of quality management. Implementing a system of quality management will require a significant effort from firms.

Market competition and fee pressure

The audit market, once characterized by a handful of major players, has evolved into a highly competitive arena. Firms, both large and small, vie for clients in an environment where differentiation becomes challenging. As a result, audit firms are compelled to distinguish themselves not only through their technical expertise but also through innovative solutions, industry specialization, and client-centric services.

Audit firms face the daunting task of striking a delicate balance between maintaining profitability and meeting clients' demands for cost-effectiveness. This pressure to reduce fees can impact the resources available for conducting thorough audits, potentially compromising the quality and thoroughness of the audit process. Maintaining a delicate balance between client satisfaction, ethical standards, and financial viability is crucial for audit firms seeking long-term success.

Conclusion

Audit firms can position themselves not only to survive but thrive in an environment where resilience and innovation are key to long-term success. Balancing client expectations, regulatory compliance, and financial viability will be pivotal for audit firms as they navigate these challenging times; technology will be a key enabler, you can start here.