The concept of transparency and rotation has been a long- standing debate in relation to the audit market both within the UAE and globally. More recently, there have been developments globally, particularly in the EU. Recent audit reforms have been introduced to promote transparency and independence. This debate has led to many other emerging economies embracing the notion of the need for such reforms, particularly in countries where commercial decisions are predominately relationship focused.
In many economies, having audited financial statements is mandatory. The auditor is required to be independent from the management team and board to ensure they remain equitable. In this way they can provide a precise, uncompromised and comprehensive view of the company’s financial position.
Over time, a working relationship is established. These relationships can transcend decades, especially within a family-owned business where relationships are passed from one generation to the next. Equally, the same could be said for a corporation where the audit relationship has been established for years, and, therefore, change isn’t seen as necessary.
The recent EU reforms have illustrated the importance of the need for audit rotation and the debate has pushed this topic up the agenda of investors and large company boards. It is clear that some companies have noted the concerns and are already reacting to the EU reform.
More recently, Abu Dhabi Accountability Authority (ADAA) has taken the primary step by announcing that it will be mandatory for any company regulated by the ADAA to rotate their auditors every four years (announced 11 Oct 2014) under the Statutory Auditor Appointment Rules (SAAR). Under SAAR regulations, all subject entities including Abu Dhabi government public entities and state-owned enterprises in Abu Dhabi must comply.
This change has been taken to further promote transparency and accountability in the local market. ADAA announced that “the objectives of the rule are to regulate the process of appointing the statutory auditors across all subject entities, which includes all Abu Dhabi government public entities and state owned enterprises.”
This mandatory rotation is a significant step in the right direction for the Emirate in relation to the current audit market. Given the level of change and the enhanced requirements currently in progress within the audit landscape within the UAE, it is inevitable that the role of audit is set to change. This change will not only effect enhanced economies, but will also be reflective in emerging economies including the UAE. This change has led way to discussions on the topic of the ‘future of audit’ and the increased demands from business stakeholders who seek not only an audit report, but a value addition report.
Grant Thornton and ACCA took the opportunity to host leading individuals from regulators and banks to highly acclaimed CFOs who represented family owned businesses, SMEs, listed companies and sovereign wealth funds amongst others, to discuss the changing role and ‘future of audit.’
The roundtable discussion found that CFOs in the UAE are looking for and expect the following, further shaping the future of audit:
- There is a need for all the regulators and key impacted stakeholders to align in advance of the introduction of the long form audit reports in 2016 to ensure that the market is fully prepared.
- Corporate entities deserve more than just a standard audit report, therefore, the long form audit report is going to consist more meaningful communication. However, there are going to be debates on what needs to be included in these reports.
- Auditors should act as business partners and help the corporate entities in growing their business and identifying possible areas of growth, all within the independence boundaries.
- Innovation was highlighted as a must in auditing techniques and standards to make the audit more productive, practical and trusted.
- Automation of audit was said to be necessary to further promote efficiency. With the sophisticated tools used by corporate entities, it was said that audit should take advantage of business intelligence and focus on testing IT controls more than going into old style vouching techniques.
- It was found that professionals from the banking sector are more interested in reviewing future business plans and accounts rather than only relying on historical audited accounts. Therefore auditing standards should cover the requirements of the lenders, who are key stakeholders, to provide comfort over future business plans.
- Audit committees need assistance from the auditors in terms of providing a detailed insight of business, controls, risks, policies and procedures. A standard audit with standard points in the management letter would not suffice in meeting future requirements. An insightful and detailed management letter would add value to the corporate entities and will raise the reverence of the audit process.
- There is a lack of consistency in the quality of auditing, which risks undermining the case for the value of audit.
The findings from the roundtable were used to create a whitepaper titled ‘The changing role of Audit’ which can be accessed via http://www.grantthornton.ae/content/files/the-changing-role-of-audit-uae- perspective.pdf
What does the future hold for audit?
What is clear is that the role of audit is evolving. The enhanced requirements we are seeing in the audit landscape in the UAE, such as mandatory rotation, are aimed at promoting further transparency and accountability in the local market. These are positive signs of a move to ensure that audit remains a relevant and valued activity to investors, regulators and a range of other stakeholders. We foresee that audit will become more forward-looking and broader with attention given to risk, governance and the underlying business model, thus adding more value to the subsequent report and moving beyond assurance of the statements alone. There is also an opportunity for the profession to embrace technological developments and reporting languages as a way of delivering the audit efficiently and cost-effectively.
With 2020 being a key year for the UAE, how much more necessary is a ‘value-add’ audit?
Audit has a key role to play as a source of public confidence in the financial reporting supply chain. We need to be clear about the benefits that audit can provide to business, the economy and society. An audit can provide evidence of issues relevant to whether a firm remains a going concern. This value of audit in promoting business confidence, combined with the skills which auditors bring to businesses and which underpin economic stability, will be critical to the UAE. This is particularly apt as we move to 2020, and particularly in light of the more challenging economic landscape brought about by volatile oil prices.
What are some of the constraints that CFOs in the UAE are currently experiencing?
One of the factors that came out from our recent roundtables is that there is a way to go for organisations to truly understand and buy into the value of audit. In addition, with the move to long-form audit reports in 2016 in the UAE, audit committees will require further upskilling in order to be fully equipped to understand the information they are being presented with. Gaining acceptance of all stakeholders in the auditing process is key to its success. Ensuring that everyone is aligned on what the purpose of the audit is and the value that it can bring can be challenging for a CFO to achieve.
Do you believe that along with audit, the role of the CFO is changing?
Absolutely, ACCA undertakes a wealth of research into the role of the CFO and what we see is that it is a role that has changed significantly over the years. Where a CFO may once have been perceived as just ‘managing the books,’ now a CFO is increasingly seen as the navigator of business success; the critical support to a CEO. Building on the finance fundamentals, they are increasingly focused on regulation, stakeholder management and the strategic vision of the organisation. This means that other skills are required to excel as a CFO; to gain the 360 degree view of the business they need excellent communication skills but they also need to lead innovation, particularly in more challenging economic conditions, when their insights can be key to the sustainability of a business. An effective audit can help them with this.
What are organisations like the ACCA doing to aid this change?
As a professional body we ensure that our members and students are equipped with not only the technical skills and expertise to understand the financials but also the business skills essential to help lead organisations. We also work with our members and key stakeholders through events such as these roundtables to help inform and prepare for changes in their regulatory environment. As a global body, we work with governments and regulators around the world to ensure that legislation is in line with best practice and in the interest of business and the wider economic success.
If you were a CFO in a listed company, what would you be doing now for the future?
As a CFO in the current environment, I would be investing in my team, ensuring there is the support and competencies, ideally through professionally qualified personnel, to navigate through more challenging economic conditions. I would also be actively engaging with the various regulatory changes that may be coming, helping to ensure that the organisation is prepared as long in advance.