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Auditing: Commoditized?

Published on Thu, Jan 30,2014 | 16:06, Updated at Thu, Jan 30 at 16:06Source : 

By: Sriraman Parthasarathy, Partner- Deloitte Haskins & Sells

In the 21st century, revolutionary changes have taken place in all fields, thanks to globalization and innovation! Audit service which has been considered historically as a prestigious service rendered by high quality audit professionals has also undergone tremendous changes. Whilst the changes are always considered as need of the hour and a step towards improvement, one has to understand the background, cause for the change and its consequences carefully.

Audit as a profession thrives on the principle of trust and credibility. Reputation for an auditor is built over a period of time based on various factors including professional skills and personal qualities, the effectiveness of the audit process, ability to meet the expectations of various stakeholders and above all integrity and culture. In the olden days, clients used to run behind reputed auditors to take up their financials for audit purposes since they perceived that such an attestation would bring in more creditability to their numbers. Now, the world has changed which is forcing the auditors to chase their clients for getting work! Fundamentally, when there is a change in the dependency dynamics, it would have its natural impact on the quality and the effectiveness of the work.

The core values attached to the audit profession inter alia include honesty, integrity, independence, objectivity, and professional competence. Whilst the rapid changes in the external environment is forcing the audit profession to adapt and change to cope up with the stakeholders expectations, any dilution in these core values is not good for the profession. The concept of treating the auditor as any other service provider is going to make this profession more vulnerable and ultimately this could result in commoditizing the entire audit process. Whilst the current situation is the result of various factors including the financial failures of large corporates, major accounting scandals, economic situations, and complex business arrangement, commoditizing the audit process is not going to be a solution for addressing this. Instead realization of the core values of the profession and reincarnation of the professional on such a platform is the need of the hour.

When you go to a family doctor, you trust him and he knows your health / family history and deals with your illness appropriately taking into account all these factors. The question of money, competition etc. has a very limited role to play under such circumstances where trust prevails. Whilst competition is good for improving the quality of the service at economical rates, this cannot replace the special and trusted relationships built up over a period of time. The value of the service rendered always depends on the value created / perceived by the users. The relationship between the auditor and his client is to a certain extent similar to that of the Doctor and the Patient where trust and integrity play a crucial role. The client for an auditor is the entity and all its stakeholders and not the management or promoters only. However, dilution in the application of the core values of the profession and treating the management / promoters of the entities as “Clients” rather than the “Entity & its Entire Stakeholders” has resulted in Expectations gaps, Trust deficit in the minds of the external stakeholders, Enhanced regulatory oversight in the form of Prescribing Do’s and Do Not’s for auditors, Audit Rotation, Tendering and Bidding etc.

In the western world, the audit service is considered as a procurable service and the auditors are chosen through tendering/ bidding process in several geographies. Whilst it helps the companies in getting the audit service at a competitive cost and brings in efficiencies, this could also adversely impact the process of audit. For winning the bid, the auditor could end up with quoting low fees or undercutting his fees impacting the extent of audit undertaken which is not good for the stakeholders in the long run.

In India too, the concept of audit rotation is being introduced along with various other regulatory changes. The concept of rotation also has its own merits and demerits. Whilst, this would certainly help in demonstrating transparency and removing perceived bias, it also has the effect of commoditizing the audit by making the auditors run for their business and making the profession a business. When quality is taken as granted, the key differentiator in selecting the auditor would be commercials which ideally should not have an impact on the audit quality at the time of execution. This should not lead to a situation of cutting the foot to match the size of the shoe!!

Unfortunately due to the changed environment, the Profession is slowly becoming a business. One should always remember that the audit profession is built on a special platform cemented with trust and credibility and this cannot be equated to any other normal service. Professionals should always keep the core values of the profession in mind and ensure that innovation in the profession goes in the direction of widening the professional horizons and boundaries and not in commoditizing the audit process!


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