AUDITOR SKILLS IN A

CHANGING BUSINESS
WORLD
 Published September 2016
ICAS and FRC
© 2016

ISBN: 978-1-909883-25-3
EAN: 9781909883253

This document is published by the Research Committee of The Institute of

Chartered Accountants of Scotland (ICAS) and The Financial Reporting Council
(FRC). The views expressed in this publication are those of the Steering
Committee and do not necessarily represent the views of the Council of ICAS
or the FRC.

No responsibility for loss occasioned to any person acting or refraining from

action as a result of any material in this publication can be accepted by the
Steering Committee or the publishers.

All rights reserved. This publication may not be reproduced, stored in a

retrieval system or transmitted in any form or by any means, electronic,
mechanical, photocopying, recording or otherwise, without prior permission
from the publishers.

For requests to reproduce this publication, please contact: [email protected]

CONTENTS

Foreword .................................................................................... 1

Acknowledgements .................................................................. 2

Executive summary .................................................................. 3

1. Introduction ............................................................................. 5

2. The context for the research ............................................. 6

3. Key themes ........................................................................... 9

4. The next steps ..................................................................... 15

Appendix A: Research summary .......................................... 17

Endnotes .................................................................................... 21

Contact us ................................................................................... 23
FOREWORD

The annual external audit has long been a cornerstone of commissioned two pieces of research in 2013 to assess the mix
corporate governance and the operation of equity and debt of attributes, competencies, professional skills and qualities that
markets. However, a series of corporate scandals – such as require to be combined in an audit team in order for it to perform
Enron and WorldCom – and the financial crisis of 2007/2008, a high quality public interest audit in a modern and complex
led some to question whether audit remains fit for purpose in global business environment. The two bodies also established a
modern society given the increasing complexity of business. Steering Committee to oversee these research projects and to
produce a report highlighting the implications of the key findings
These challenges have led to some significant changes to audit from the research reports.
and to the role of audit in the overall corporate governance
structure. Recent innovations include the introduction This report of the FRC/ICAS Steering Committee:
of enhanced audit reports, and also jurisdiction specific
innovations, such as, in the UK extended audit committee reports (i) assesses the findings of the two research teams that were
and viability reports – all of which entail heightened auditor published in April 2016; and
involvement.
(ii) builds on those research findings to identify the key themes
Furthermore, technological developments, such as robotics emerging and to recommend where changes are required
process automation, continuous controls monitoring and the use to enable the audit to serve the perceived needs of society in
of data analytics techniques, have highlighted that the role of the future.
audit, and indeed, how it is undertaken, will continue to evolve.
That evolution will be both demand and supply led: demand, as This report will be of interest to anyone who has an interest
users seek assurance over new types of information; and supply, in audit and indeed corporate reporting. The 2014 EU Audit
as audit firms seek to utilise technological advances to increase legislation will undoubtedly have an impact on the audit
the effectiveness and efficiency of the audit. profession. However, only by keeping pace with market led
developments will audit continue to play its key role in the proper
However, whilst there has been extensive focus on how audit functioning of capital markets.
should evolve to meet societal expectations, there has not been
the same focus on the skills that auditors will need to use the The key themes explored in this report will have far reaching
new technology, provide the audit of the future and make the implications for the role of audit and for those who undertake
assessments expected of them. such engagements.

In light of the challenges and opportunities facing the auditing Richard Fleck CBE
profession, the Financial Reporting Council (FRC) and ICAS Chairman of the joint ICAS/FRC Steering Committee

1
 ACKNOWLEDGEMENTS
ICAS and the FRC would like to thank the members of the Steering Committee who produced this report and the academic team
members who undertook the independent research.

Steering Committee Researchers

Mark Allison Team 1

Executive Director, CA Education, ICAS
Karin Barac
Mark Babington University of Pretoria
Deputy Director, Audit Policy, FRC
Elizabeth Gammie
James Barbour Robert Gordon University
Director Technical Policy, ICAS
Bryan Howieson
Jim Bishop University of Adelaide
Chair of ICAS Member Engagement Board
and previously Convener of ICAS Audit and Marianne van Staden
Assurance Committee University of South Africa

Louise Crawford Team 2

Professor of Accountancy, Robert Gordon University
and member of ICAS Research Committee Stuart Turley
Manchester Business School
Michelle Crickett
Director of Research, ICAS Christopher Humphrey
Manchester Business School
Angus Duff
Professor, University of West of Scotland Anna Samsonova-Taddei
and previously ICAS Research Advisor Manchester Business School

Richard Fleck CBE (Chairman) Javed Siddiqui

Deputy Chair IESBA; Previously Director, FRC Manchester Business School
and Chair of APB, FRRP and Conduct Committee
Margaret Woods
Douglas Flint Aston Business School
Group Chairman, HSBC Holdings plc
Ilias Basioudis
Marek Grabowski Aston Business School
Director, Audit Policy, FRC
Chrystelle Richard
Mark Hatton ESSEC Business School
Partner in Charge of Graduate Recruitment, EY

Steve Maslin
Partner, Grant Thornton

Allister Wilson
Partner, EY and Convener of ICAS Research Committee

It should be noted that the members of the Steering Committee were acting in their personal capacity and were not representing the
organisations for which they work.

2
EXECUTIVE SUMMARY

We are facing a future characterised by unprecedented

organisational and informational complexity across business,
with corporate and business reporting evolving rapidly. If audit
is to evolve to keep pace with these changes, now is the time to
consider what the audit of the future will look like and whether
audit teams have the skills that will be needed to deliver a
different kind of audit.
The profession needs
There appears to be a clear choice. The statutory audit could
be maintained, much as it is now, to provide a basic policing to engage in a debate
function within the corporate world; or the audit profession on the future of audit
could be a driver for change and develop a more insightful and the skills needed
audit for a more complex world, and by providing such an audit, to meet that vision.
auditors could help to meet the evolving needs of stakeholders,
including investors, and society.

The Steering Committee believe that, in relation to the audits

of large multi-national companies, the latter option is the way
forward. However, the profession currently finds itself in a
catch-22-like situation. A real opportunity exists for the audit
profession to be at the forefront of evolving the audit into a
more holistic assessment of a company’s strategy, business
model, risk profile, operations and performance. However, This report highlights the Steering Committee’s view of what
based on the findings from the research commissioned by needs to change to bring about this vision. We focus on three
ICAS and the FRC, referred to later in this report, it is doubtful main skill areas that need to be developed to equip the audit
whether the profession currently has the skill base necessary to team of the future to undertake such an audit that is more
deliver an audit beyond the traditional financial statement audit. holistic and useful for stakeholders and society. These are
It is important to appreciate that the audit skill base needs to be categorised as advanced business acumen skills, technology and
developed at the same time as the audit of the future evolves – data interrogation skills and soft skills. We also identify barriers
however that might be defined. Waiting for the audit to change or current impediments to change which we believe need to be
before developing the skill base will be just too late, given the overcome in order for this vision to become a reality, such as
time-lag involved in recruiting, developing and training staff. the problems of recruiting and developing audit team members,
the extent to which standardisation may impair the development
The Steering Committee recognise that changes to audit do of judgement and audit innovation and the perception of audit
have to be demand driven and it is important that stakeholders, as a career of choice. We finally conclude with a number of
in particular, investors are involved in the debate on the future recommendations for all stakeholders to consider. Maybe the
of audit. The audit is already starting to evolve and there is most important of these is that all those in the profession need
evidence1 [Forbes Insights, 2014) that the audit of the future will to engage in a meaningful debate on both the future of audit and
need to provide: the resultant skills needed to meet that vision.

• more transparency into what has been learned during the We do not claim to have all the answers to the issues raised
course of the audit; in this report but hope that this publication and the academic
• perspectives on key information generated by management; research which it is drawn from, will be a starting point to that
and constructive debate. The profession needs to develop a vision of
the audit of the future and the skill set needed. And it is essential
• deeper insights on company performance, operations and
that the profession engages stakeholders in the debate if it is to
risks.
deliver a high quality public interest audit for the future.

An enhanced audit may also provide a more attractive and

compelling audit career path for the profession. In this way, a
new, varied and different talent profile may be attracted into the
profession to deliver the audit of the future.

3
 Auditor skills in a changing business world

CHANGING ENVIRONMENT/SOCIETAL EXPECTATIONS

PRESSURE TO CHANGE THE NATURE OF AUDIT

NEED TO DEVELOP KEY BARRIERS

SKILLS IN THE AUDIT TEAM Recruitment &
development
Business acumen
Standardisation
Technology & data
interrogation Attractiveness of
career
Soft skills

RECOMMENDATIONS
Firms
Professional bodies
Regulators & standard setters
Investors

DEBATE & IMPLEMENTATION

A HIGH QUALITY PUBLIC INTEREST

AUDIT IN A CHANGING ENVIRONMENT

This figure summarises the content of the Steering Committee report and the process which will need to take place to ensure that
the profession can meet the needs of changing stakeholder and societal expectations.

4
1. INTRODUCTION
In 2013 The Financial Reporting Council (FRC) and The
Institute of Chartered Accountants of Scotland (ICAS) jointly Corporate reporting is changing so as to integrate better
commissioned two major research projects2 to investigate the narrative and financial reporting. As a result, the nature of
competencies and professional skills of auditors of large multi- audit is changing and auditors need to be more involved in
national companies. the narrative elements of the annual report.

The research teams were asked to address the following key Against this backdrop, it is also likely that the attributes,
question: competencies, professional skills and qualities required of
auditors will need to evolve in order to keep pace with the
What mix of attributes, competencies, professional needs and expectations of stakeholders.
skills and qualities need to be combined in an audit
team in order for it to perform a high quality public Richard Fleck, Chairman of the joint ICAS/FRC Steering
interest audit in a modern and complex global Committee
business environment?
– for example, the ability to detect a breach in the company’s
The research was commissioned at a crucial time in the accounting system. Second, the objectivity of the auditor – for
evolution of corporate reporting and audit, where public and example, the willingness to report any identified breach in the
market confidence in audit was low and a number of regulatory company’s accounting system.4 It is also the case that ‘audit
initiatives were being considered by, among others, the FRC, quality’ means different things to different constituencies. For
governments, the European Commission, the International example, a regulator will primarily focus on compliance with the
Auditing and Assurance Standards Board (IAASB) and the relevant framework of auditing standards, on the assumption
International Accounting Education Standards Board (IAESB) to that such compliance will result in a high quality audit, whilst
enhance confidence in the value of audit and to support reform investors are likely to be concerned more with the reliability of
of the audit market. the auditor’s opinion and the likelihood that where the financial
statements contain material errors that the auditor will discover
The research teams were asked to consider whether and report them. Another way of looking at audit quality is to
a fundamental reassessment of the auditor’s skills and frame it in the context of behavioural attributes and professional
competencies is required to create an audit team that can competencies, skills and qualities – such as scepticism,
enhance confidence and meet the challenges of a changing professional judgement, industry expertise, and business
landscape. In doing so the teams were directed to explore the acumen – all of which have a direct impact on audit quality.
mix of skills that need to be combined in an audit team for
it to perform a high quality public interest audit, and look at The research projects were overseen by a Steering Committee
associated staffing models and training implications.3 that combined experienced individuals from the professional
accountancy firms, industry, the profession and academia.
The focus of the research and this report is on the audit of large Richard Fleck chaired the Committee.
multi-national companies. The Steering Committee recognise
that a changing audit and societal landscape will also have an This report brings together the key findings from both research
impact on other audited entities but this is beyond the scope of reports, and takes forward the issues that the Steering
this report. Committee believe are crucial if audit is to meet the changing
needs of all stakeholders.
The research was undertaken in a number of different
jurisdictions, seven countries in total, and the Steering The report is structured as follows:
Committee report’s findings and recommendations are intended
to have international relevance. However, owing to practical • chapter two provides context for the research and
reasons, the Steering Committee report draws on the regulatory explores the changing societal and audit landscape, which
framework in the UK and the UK response to the questions that demonstrates the need for audit and auditors’ skills to
were raised about the effectiveness of audit (see chapter two). evolve;
This is used as the basis for considering how audit skills will • chapter three identifies the key themes, based on the
further need to evolve. We recognise that other countries will research and the changing landscape, which the Steering
have responded in similar or different ways but are unable to Committee believe need to be addressed.
cover all these responses in this report. EU and international
• the report concludes with the recommendations of the
regulatory responses are also covered in chapter two.
Steering Committee and suggested next steps to take
forward the debate.
Throughout this report and in the original call for research
reference is made to ‘audit quality’. Audit quality is hard to • appendix A provides a brief summary of the research
define and measure; but is sometimes described as being undertaken and the findings and implications thereof; the full
dependent on two variables. First, the competence of the auditor reports can be accessed on the ICAS and FRC websites.5
5
 2. THE CONTEXT FOR THE RESEARCH
The Steering Committee believe that the audit profession is vision’, where the big picture that shareholders
facing a future characterised by unprecedented organisational want to see is lost in a sea of detail and regulatory
and informational complexity across business, and the audit disclosures. (para 221, Treasury Select Committee,
process will be at risk if it fails to respond appropriately to this 2009)
complexity. Against this background, it is quite possible that
the statutory audit could be maintained much as it is now to Likewise, in its Green Paper on audit policy7, published in
provide a basic policing function within the corporate world, or October 2010, the European Commission (EC) stated:
the profession could be a driver for change and provide a more
insightful audit that would help to meet the changing needs of While the role played by banks, hedge funds,
stakeholders and society. It is within this context that the two rating agencies, supervisors or central banks has
research projects were commissioned. been questioned and analysed in depth in many
instances, limited attention has been given so far
It is important to put the question of audit skills in the context of to how the audit function could be enhanced in
a changing societal and audit landscape. The value of audit has order to contribute to increased financial stability.
been questioned post the financial crisis and stakeholders have The fact that numerous banks revealed huge losses
expressed real concerns about the quality of audit, the value from 2007 to 2009 on the positions they had held
gained from audit and the ability of auditors to be adequately both on and off balance sheet raises not only the
sceptical given the complexity of the transactions and evidence question of how auditors could give clean audit
to be assessed. Auditors have a role in society to help meet reports to their clients for those periods but also
the needs of investors for reliable information on corporate about the suitability and adequacy of the current
governance and financial performance so as to facilitate the flow legislative framework. It seems thus appropriate
of capital – yet we are living in times when the audit assesses that both the role of the audit as well as the scope
and reports on a system of business and finance that no longer of audit are further discussed and scrutinised in
enjoys broad social confidence. the general context of financial market regulatory
reform. (pg. 3, European Commission, 2010)
If audit is to meet the expectations of business and other
stakeholders and deliver on its public interest role it surely must
The EC also commented that:
change. Whilst it is not the purpose of this report to address
what ‘audit’ in the future will look like – it is important that there
Extension of the auditor’s mandate
is an awareness of the future direction of travel of audit, if firms
and audit teams are going to develop so as to be able to meet The focus of audits so far to a large extent has been
future challenges. based on historical information. It is important to
consider the extent to which auditors should be
This section of the report therefore looks at some of the assessing forward looking information provided
questions which have been raised about the effectiveness of by the company, and given their privileged access
audit, the regulatory response to date, market led developments, to key information, the extent to which auditors
stakeholder demand for increased transparency and the should themselves provide an economic and
implications of these changes. financial outlook of the company. The latter would
be particularly pertinent within the context of
Questions about the effectiveness of audit ‘going concern’. Forward looking analysis, at least
for large listed companies, has so far been covered
Following the financial crisis there have been many evaluations by equity analysts and credit rating agencies. The
of the role of audit by various bodies around the globe. One such role of the auditor should thus be extended in this
review was undertaken by the Treasury Select Committee as direction only if there is real value added to the
part of its inquiry into the banking crisis in the UK. In its report of stakeholders. (pg. 9, European Commission, 2010)
May 20096 it stated:
The regulatory response
We have received very little evidence that auditors
failed to fulfil their duties as currently stipulated. The EC Green Paper was the starting point for the development
The fact that some banks failed soon after receiving of new audit legislation in the EU in the form of an EU Directive
unqualified audits does not necessarily mean (Directive 2014/56/EU) and an EU Regulation (Regulation
that these audits were deficient. But the fact that 537/2014) which were entered into the EU Official Journal in
the audit process failed to highlight developing May 2014.8 These reforms are being implemented by the various
problems in the banking sector does cause us to EU member states, including the UK, and take effect for periods
question exactly how useful audit currently is. We beginning on or after 17 June 2016.
are perturbed that the process results in ‘tunnel

6
The introduction of mandatory tendering of audits and The EU, in their 2014 revision (Directive 2014/56/EU) of
mandatory rotation of audit firms for public interest entities Directive 2006/43/EC on statutory audits, has made no material
has led to firms competing on audit quality and innovation to change to the requirements for skills, knowledge and values
win tenders by increasing audit efficiency and effectiveness either in the initial or continuing professional development area.
and through the novel utilisation of technology within the audit. The basic statutory requirement originating in the 1984 EU
The implementation of the EU Audit Regulation will require Directive and enacted in the UK originally in the Companies Act
audits to be tendered in the UK at least every ten years with the 1989 have changed little over the past 30 years. Audit is evolving
maximum consecutive duration of an audit firm tenure being but the qualification requirements in statute are not.
twenty years. In the UK this has been coupled with revisions
to the UK Corporate Governance Code9 and the Order issued The IAESB18 issued in 2008 International Education Standard
by the Competition and Markets Authority (CMA)10, which have 8 (IES8) - Competence Requirements for Audit Professionals.
significantly increased the frequency at which the audits of This has been significantly revised by a replacement IES8 -
large entities are put out to tender. This has led to considerable Professional Competence for Engagement Partners Responsible
pressures on audit partners to win new audits and also, at least for Audits of Financial Statements - which is effective from
in the shorter term, to seek to retain existing audit clients. 1 July 2016. Both the original IES8 and the revised IES8 set
skills and knowledge requirements for audit professionals yet
Other regulatory measures in the UK have been introduced, the effect, currency and recognition of this private sector self-
not via legislation, but by the FRC making changes to standards regulation is open to question. Auditing firms are not bound by
and guidance. One such FRC innovation relates to the reports the International Education Standards (IES), the IES are not
issued by auditors. The FRC revised its International Standard referenced in legislation in Europe and both regulators and
on Auditing (ISA) 700 (UK and Ireland)11 to require auditors professional bodies are, at best, ambivalent about application of
to provide shareholders with greater insight into the key risks IES8.
that they had identified in the audit and how they had gained
sufficient evidence to mitigate those particular risks. The Market-led developments
FRC has published separate analysis of the first two years of
implementation of this revised standard12, which illustrates As well as regulatory changes that have impacted on the role
the innovation that has taken place within the profession. The of the auditor there have also been market led developments in
International Audit and Assurance Standards Board (IAASB) other fields in which the auditing profession has a keen interest.
has also now issued its revised ISA 70013 which has adopted For example, in the environmental, social and governance field,
a similar approach, although unlike the FRC it has not required such as the area of natural capital, it is highly likely that some
auditors to disclose the level of materiality adopted. form of assurance will be sought over such information within
corporate reports in the future.19 The introduction of integrated
There has also been recognition of the importance of the reporting, which is mandatory in South Africa and Brazil, and
narrative component (the ‘front-half’) of annual reports the work of the International Integrated Reporting Council
if companies are to provide a more cohesive and holistic (IIRC)20 has also led to discussion on the role of the auditor.
explanation of their performance and their business model. The
UK Government introduced the strategic report requirements14, As a result, auditors are breaking new ground and will be
which has led to a more cohesive story between the front- issuing assurance opinions over different types of information
half and back-half of the annual report. The FRC subsequently from that with which they have normally been associated in
introduced requirements for boards to include a ‘viability the past, including key elements of the ‘front-half’ of the annual
statement’ in the strategic report15, this aims to provide an report, corporate social responsibility (CSR) reports and other
improved and broader assessment of long-term solvency and corporate information. Much of this information will be more
liquidity than the traditional going-concern requirements. subjective in nature than that featured in a traditional financial
statements’ audit, requiring auditors to exercise more judgement
The FRC also introduced a provision in the UK Corporate and business knowledge. That said, some would argue that
Governance Code for annual reports to be ‘fair, balanced and considerable subjectivity is also present in various areas of
understandable’.16 Whilst this responsibility falls upon the the financial statements of a multi-national enterprise, for
directors of a company, auditors are now requested to report example, the valuation of certain financial instruments, goodwill
by exception where they believe the annual report prepared by impairment assessments etc.
a company’s directors is not fair, balanced and understandable.
This has led some within the profession to debate the exact Stakeholder demand for increased transparency
nature of the assurance being provided, particularly in relation
to the front-half of the annual report. Some experts believe that Auditors have a societal role and audit is a service that can
auditors are now providing negative assurance on such matters; provide formal structure to the environment of trust that
whilst others would argue that the nature of the assurance being business and society need to operate within. However, trust in
provided is outwith the International Auditing and Assurance the audit and in auditors was dented as a consequence of the
Standards Setting Board’s assurance framework.17 There is little financial crisis, although recent evidence suggests that this has
doubt that what is required of auditors is more than the previous recovered.21 In addition, audit is a ‘black-box’ process which
consistency check between the narrative information and that is largely invisible to those who rely on it, making it difficult
featured in the financial statements. for stakeholders to properly understand or trust the audit
7
 process. We therefore need to explore the ways in which audit Whilst the creation of new potential income streams will
can demonstrate its value and contribute to a more trust-rich be viewed as an undoubted opportunity for the profession,
society. questions will be raised as to the readiness of the profession to
meet the assurance expectations of stakeholders. Indeed, there
Until very recently the actual output from the audit, i.e. the may be more stakeholders with an interest in reports on matters
auditor’s report, had not changed significantly since its such as the use of natural capital than there are in relation to
introduction. Auditors were effectively required merely to issue a financial statement audits. Do audit firms have the breadth
binary opinion as to whether the financial statements of an entity of skills required to meet the challenges that are beginning to
showed a true and fair view of its financial performance and emerge today and will continue to emerge in the years ahead? If
financial position. The recent revisions to audit reports, referred not, how will they bring in the necessary experience and skills?
to above, have changed how the significant findings of the audit
are reported and provide more useful information for users in How will audit evolve in the future? Will we move to real
the audit reports. time continuous audit – continual monitoring of controls and
assurance at any point in time and more focus on real-time
These developments have been driven by regulators responding assurance on communications to the market place, rather
to stakeholder demands for there to be greater insight into than just corroborative assurance over historical financial
the audit process. Stakeholders want increased transparency information? Or will we be auditing the culture of an entity?
from auditors; they want more information about the risks Whilst this appears a long way from the traditional audit, an
being faced by the business, how those risks are managed assessment of an entity’s culture is important in any audit risk
and the key judgements in the financial statements. Therefore, assessment. The FRC’s current ‘Culture Project’22 already
more light is now being shone on the work that the auditor includes a workstream ‘embedding and assurance’ which
undertakes behind closed doors before reaching their opinion. is looking at measuring and monitoring culture, the role
This increased transparency is likely to be a continuing theme of internal audit, risk management and public reporting of
as stakeholders will want even more information in relation to cultural indicators. A 2014 Forbes Insights report, which was
the key judgements that have been made in the preparation of commissioned by the Global Public Policy Committee (GPPC) of
the financial statements. For example, in the case of goodwill the largest six accountancy firms, and based on engagement
impairment testing, the auditor currently provides details of with hundreds of stakeholders worldwide, suggested that audit
the work they undertook in relation to forming their judgement needed to evolve to provide:
on impairment and how they satisfied themselves that the
company’s provision is within an acceptable range. Going • more transparency into what has been learned during the
forward, however, it is likely that there will be a need for the course of the audit;
auditor to state what he believes the acceptable range to be. • perspectives on key information generated by management;
The sensitivity of information is likely to become accepted as and
something that requires to be disclosed to better inform users.
• deeper insights on company performance, operations and
The audit profession surely has a role to play in informing
risks. [Forbes Insights, 201423]
stakeholders about the role of audit and what it can and cannot
deliver.
The Forbes’ study purposely did not address implementation
What will the future hold? challenges. This Steering Committee report therefore takes
the debate further by covering some of the implementation
It is clear, therefore, that the nature of audit has already begun to challenges relating to the composition and skills of the future
evolve more rapidly than has previously been the case and this audit team.
process is likely to continue. In the future it is likely that auditors
will provide more assurance on the annual report as a whole, In summary, there are a number of changes that have and
particularly the narrative sections, than is currently provided. It indeed are taking place in business and in society that will
is also likely that other information that is provided to the market continue to impact on the role of the auditor. The Steering
will require assurance, and that assurance will be provided Committee believe that these developments will require a
in areas involving considerable uncertainty and subjectivity. change in the skills required of tomorrow’s auditor. It is within
Although it is not yet clear what experience and expertise will this changing context that the research was commissioned
be involved in providing such additional assurance, audit firms and undertaken. Appendix A provides a short summary of
will want to provide these services. The developments in audit the research findings of the two research projects5 that were
since the crisis and the likely changes in the future all point to commissioned to consider the professional competencies and
a move away from ‘just’ auditing the financial statements to a skills needed by audit teams to deliver a high-quality audit today
more risk and judgement based assessment upon a business. and in the future. The next chapter looks at the key themes
Whilst technology will have a part to play in this process, it is which the Steering Committee believe have emerged from
important to remember that technological solutions often tend to the two research studies and seeks to provide suggestions as
forget about the importance and role of people. In this respect, to how the role of the auditor, the assurance services to be
enhanced assurance is likely to require considerable professional provided and the related skill sets are set to develop.
judgement.

8
3. KEY THEMES
In this chapter of the report the Steering Committee assess the These changes in audit have implications for the required skill
skill set that is currently required of a competent auditor and set of auditors and these are explored in the following section.
contrasts that with the skill set that would put that auditor into a
much stronger position to deal with the changing expectations Key skills required
of an auditor in a fast developing business/societal environment.
The barriers to change are then discussed before concluding If audit teams are to be equipped to meet the challenges of
with questions which need to be debated and addressed in order today and tomorrow, the Steering Committee has concluded that
to achieve the audit skill set necessary for the future. auditors will need to enhance the following key skills:

The chapter draws upon and highlights its acceptance of the i. business acumen;
findings from the research commissioned by ICAS/FRC, which ii. technology and data interrogation; and
are summarised in appendix A of this report. The Committee’s
iii. soft skills.
assessment is based on both the full research reports and the
collective knowledge and experience of the members of the
Steering Committee. The research reports, particularly the Barac et al. report, identify
a large number of skills and competencies required of auditors
The changing nature of audit - a future skills today and in the future. The Steering Committee recognise the
crisis? extensive and broad base of skills required of auditors and rather
than repeat the research findings here we focus on these three
The research undertaken by the research teams confirms that key areas which the Committee believe require specific attention.
audit teams have the skill sets to meet today’s requirements.
However, as discussed in chapter two, demands on corporate Business acumen
reporting and auditing are changing and the financial crisis
brought increased challenge to the role of reporting and auditing. Both research projects identify business acumen as a key skill.
Many have criticised the audit profession for failing to ‘see the However, it appears that the development of business acumen
train coming down the line’ and, whilst it is questionable as to requires greater focus than it currently receives within the firms,
whether this was due purely to a skills shortage in the auditing especially at the entry and lower levels of the profession. Put
profession, the crisis and the subsequent investigations and simply, if an auditor does not understand the dynamics of the
debate have changed expectations. business, that auditor cannot audit or challenge it effectively –
because he or she will not have the necessary understanding to
The concerns that the Steering Committee has as to the assess any information or explanations that may be provided.
skill set that the audit profession requires are borne out by
the research which suggests that – whilst there is a general The auditing standards require the auditor of an entity to have
satisfaction with auditors’ current capabilities – there is a an adequate understanding of that entity’s business, and its
concern about a skills shortage in the future, especially if the industry. In order to have that adequate understanding, the
scope of audit is to widen.24 Whilst auditors will continue to Steering Committee believe that there needs to be much more
be required to provide assurance on historical financial data, emphasis within the audit firms on ensuring that members of
this may be a subset of what will be expected of them in the audit teams better understand the businesses they audit and the
future. It is likely that the range of the information that will drivers of value within their industries.
be subject to audit or assurance will expand. In particular,
there will be a focus on more forward-looking and narrative Business and commercial acumen is also perceived to be
information within the annual report and also to new types of essential as the scope of audit increases, in response to
assurance on issues such as corporate culture, natural capital, stakeholders’ expectations, to cover more of the narrative or
social and environmental issues. Indeed, some of this is already ‘front-half’ of the annual report or wider company information.
happening.25 Such acumen is essential if the risks to the business and thus
the audit are to be identified. As financial statements have
The revised International Education Standards issued by the become more complicated, the auditor has a role to play in
IAESB (IES2-6) effective from July 2015, set requirements in helping users interpret information. This is seen in the extended
the areas of professional scepticism and professional judgement, audit report, introduced by the FRC in the UK, and also more
softer skills, data analysis and business strategy at the point of recently by the IAASB. In this more detailed report, the auditor
initial qualification. The revised IES8, effective from July 2016, takes time to draw to the users’ attention and to help them
applied these requirements specifically to the role of the audit understand, not just the technical issues, but the business
engagement partner. Whilst there is currently little evidence of implications and key risks that might impact on the financial
the effect of these changes, the Steering Committee consider statements. In addition, the key judgements and their impact on
that a plan for gathering such evidence should be established the financial statements are now highlighted by the company
and that the full suite of International Education Standards (1-8) and the auditor is expected to be able to report by exception on
be reappraised in light of the findings of this research. whether the annual report is fair, balanced and understandable.
9
 Given that both research reports demonstrate that business the objective and data requirements of the analysis, to apply the
acumen is an essential skill, the challenge is to enable auditors necessary technology to capture the data, and finally to organise
to acquire this skill set, especially at the trainee and early career the data in a meaningful way so that the results of the analysis
stage. It would not be realistic to expect that the auditor should can be interpreted appropriately in order to provide relevant
have more business specific knowledge than those running audit evidence.
the business. However, new methods of increasing business
knowledge within audit teams need to be adopted. This may There is no doubt that the firms have individuals and specialists
be achieved through training, particularly ‘on the job training’ with extensive technology skills. However, to be able to
with a focus on understanding business models. Audit firms make use of that expertise, the audit teams need to have the
may also obtain the necessary knowledge and experience by knowledge and experience to identify when to commission
employing people from business or facilitating secondments these services, to know what questions to ask the internal
from practice to business. The Steering Committee concur specialists, and to know how to decipher the answers they get
with the recommendation of the Barac et al. research team that back. The Steering Committee question whether audit teams
audit teams of the future should include industry specialists generally have the necessary experience to make use of internal
who receive appropriate training in audit to make them effective specialists to make effective use of technology, to mitigate the
members of an audit team. Furthermore, as well as developing risks that such technology poses and the ability to interrogate
business acumen in audit teams, there may also be a case for and interpret data.
increased dialogue between institutional investors and audit
firms to better understand the information needs of investors. There is also the opportunity for firms to deploy in their audits
some of the analytical tools used in their advisory businesses,
The Steering Committee believe that the experience gained such as fraud analytics tools, to provide some of the greater
from undertaking other types of accounting services such as insights which are being demanded by stakeholders.1
due diligence and forensic services helps staff to develop more
business acumen and enhance their audit skills. Whilst auditors Advances in technology also pose new challenges and risks both
used to be able to obtain this type of experience, there is a for businesses and their auditors. These new challenges include
perception that this is no longer the case. Enhanced ethical and auditing in an environment of robotics process automation and
independence standards now reduce or prevent audit firms continuous controls monitoring, and these new risks include
from accepting such engagements for audit clients, although issues such as cyber security and reputational risk. Against this
such engagements are undertaken by the firms for non-audit background, the question is whether auditors have the requisite
clients. However, these assignments are largely undertaken by skills to recognise and analyse the risks that ever advancing
corporate finance teams, thus audit team members do not gain technology poses to the companies they are auditing and the
the valuable experience from undertaking such assignments. ways in which technology risks can turn into major business
risks for the client.
Technology and data interrogation
On a more positive note the advances in audit technology, whilst
The technological landscape is changing fundamentally and this requiring new skills, may also offer an opportunity to reduce
requires a fundamental rethink on how we plan and conduct an the time spent by staff on ‘routine’ audit tasks, enabling them to
audit. Does the profession currently have the skill set to do this? spend more time analysing evidence, following up anomalies,
and exercising professional judgement (with the benefit of
Advances in technology provide opportunities for improving audit their greater understanding of the business) – the value added
quality. The Steering Committee believe that the key question elements of the audit process.
is how firms can audit big data most effectively and efficiently
in the future in order to provide a more insightful audit. Do the Soft skills
firms have the skills and technology to do so and do we have the
auditing standards that enable such innovation. At the moment The ability to apply professional judgement and exercise
there appears to be a disconnect between the firms’ approach professional scepticism are pre-requisites for audit quality.
to auditing big data using data analytics and auditing standards. Whilst not new skills, the auditor will be expected to exercise
The implication of this for auditing standards is discussed later in judgement over a much greater range of professional issues
this chapter. and the Steering Committee question whether professional
judgement receives sufficient ranking in firms’ development and
The Steering Committee welcome the fact that the larger firms performance measurement procedures.
are making substantial investments in data analytics. Data
analytics enable audit teams to interrogate entire populations Applying professional judgement is not easy and it is a skill that
of data, rather than relying on results of sampling a small part takes time to be developed and needs appropriate mentoring
of the data available. This resource should enable companies and coaching. The ICAS Professional Judgement Framework
and their auditors to identify inconsistencies in business activity first published in 2012 and updated in 2016 aims to support
– often an indicator of impending business problems and professionals in making a judgement and can also be used as a
fraud and offers the opportunity for significant improvements training resource.26
in audit effectiveness and efficiency. The use of data analytics
requires significant specialist expertise, for example to identify
10
There is a perception, identified in the Turley et al. research, of Recruitment and development
‘auditors being stuck in a room’ somewhere and not spending
sufficient time ‘face-to-face’ with client staff. Yet challenging In an audit requiring more and more sophisticated judgements,
management requires the auditor ‘to be able to read the person who will have the experience and expertise to make these
across the room’. The remoteness of audit teams from the client judgements? Junior staff cannot be expected to have the
and the client’s staff means that this skill is potentially not as requisite skills for these judgements. If they are not exposed to
developed as it should be. If auditors had more engagement with the audit decision makers and the processes for making these
the client, they would surely understand the business better and judgements, they will not develop the skills necessary to make
the thoughts and motives of the client staff. Auditors are also these types of decisions in the future. The firms’ current pyramid
increasingly required to consider and assess the ethical and training model does not appear conducive to the development of
cultural make up of boards, management and organisations and staff with the appropriate business knowledge and skills required
the resultant impact on risk. Audit teams are also required to for the future. The traditional pyramid model in accounting firms
have a greater understanding of different international cultures refers to a business model where high numbers of trainees are
on a multi-national audit. recruited to undertake accountancy training, with large numbers
then leaving upon qualification and only a minority staying to
To exercise professional judgement and professional scepticism progress to more senior levels within the firm.
more effectively, the Steering Committee believe that much
greater emphasis should be given to the development of the The profession competes in the market place for student intake
psychological and behavioural skills that are key to successful from prestigious universities. However, there is a view that
auditing. These skills are essential to the auditor’s assessment whilst high quality talent is being recruited, some of the initiative
of management, its integrity and reliability, and board culture. and enthusiasm is driven out of the trainees by the time they
Whilst the ability to apply judgement and scepticism is gained qualify, due to the routine nature of the work they undertake.
through experience, training auditors in how to evaluate Others believe that the current recruitment process does
corporate culture, behaviours and conscious and unconscious not obtain the ‘right’ talent. New initiatives in the UK include
bias would help with the development of these skills. recruiting school leavers in addition to the traditional university
graduates and removal, in some cases, of the academic
If the audit profession is to earn respect and deliver its role requirements.28 Diversity is required within the profession if we
in society, the profession and the individuals within it must are to bring in people who are willing and able to challenge the
act ethically and with integrity, and importantly must be seen ‘emperor’s new clothes’. A third view arises from the fact that,
to do so. The Steering Committee believe that giving audit whilst you can teach the technical and accounting elements, it
professionals appropriate training in ethics and a supportive is more difficult to teach someone to develop an enquiring mind
environment is key if individually they are to learn how to – and there is concern that the recruitment process focuses
challenge judgements and be able to stand up for their views.27 on whether the candidate is likely to pass their professional
exams, without equivalent focus being given to the personal
To some, these issues are ones which have all been discussed characteristics of the individual and whether they are suited to
before and are nothing new. The ICAS motto Quaere Verum one of the many disciplines that firms now undertake, including
meaning ‘seek the truth’ and the Latin for ‘audit’ comes from audit.
‘to hear’ – demonstrates that such skills have always been
required in the profession. However, the context in which audit The Steering Committee believe that audit recruitment
is undertaken and the complexity of modern business have processes need to recognise that the required skill set for
changed - so the time is right to find a modern day solution. auditors has changed. These skills are identified in the research
(see appendix A) and are discussed further on pages 9 to 11 of
Barriers to change this report. In particular, the Steering Committee believe that the
profession needs to recruit for the audit practice individuals who
The current environment is not necessarily conducive to the have a questioning mind. However, this is challenging. Audit has
changes required and a number of barriers or impediments become a smaller proportion of fee revenues for the firms and,
to change do exist. So if audit teams and skills are to change as a result, a more client focused attitude has prevailed. Yet the
to ensure the viability of a high-quality audit what barriers to ‘personality’ needed for audit may not be the same as for the
change need to be overcome? more client focused service lines within the firm. How will the
person who is keen to find problems, i.e. ‘look for trouble’, and
The Steering Committee has identified the following main have the courage to escalate issues be identified and recruited?
barriers to change: And most importantly how will these individuals be retained
within audit after completion of their qualification?
i. recruitment and development issues;
ii. the implications of standardisation; and The research reports identify the need for multi-disciplinary
iii. the lack of attractiveness of a career in audit. teams with individuals with specific specialisms, for example
geologists, engineers etc., being brought together on audit
teams. Whilst to some degree this is already taking place, the
integration and functioning of these teams and the impact on

11
 how and who the firms recruit, and on the traditional pyramid The research identifies a concern that the current levels of
model, needs further consideration. As discussed previously, global standardisation, where an auditor needs to follow a firm’s
there is also a need to consider how such specialists should be methodology through its audit software, may inhibit the exercise
trained and/or qualified in audit to make them more effective of professional judgement and therefore audit quality. Audit firm
members of the audit team. The dynamics of any team are methodologies, regulation and international auditing standards
crucial, yet not easy to manage, especially if individuals are are all interlinked and may all contribute to this problem. For
coming to the team with different backgrounds and specialisms. example, it is argued by some on the Steering Committee that
Firm and audit team culture are therefore an important regulatory inspections impact on firm methodologies resulting
issue. Having a team that enables the development of less in a documentation rather than a judgement focus. The Steering
experienced staff and gives individuals the courage to ask the Committee is concerned that the current regulatory approach
‘stupid question’ is essential if skills are to be developed at the and firm methodologies, although focused on increasing quality,
same time as the delivery of a high-quality audit. There has may instead be driving out judgement and affecting recruitment
to be scope for staff to have access to ‘on the job’ training, and retention of quality people within the audit function. The
which will cover aspects such as knowledge of the business, Steering Committee believe that this may be an area that the
communication skills and professional scepticism. firms and audit regulators should consider collectively in order to
see, first, whether there is indeed an issue and, second, if there
Both research reports reveal that at least some now believe is that a solution might be found.
that the audit firms’ pyramid model, with its associated high
staff turnover, will need to evolve. In fact, its shape is already Audit firms establish global audit methodologies for very good
starting to change. The model is dependent upon people leaving reasons – to ensure compliance with standards, for regulation
the firm. But there is a concern that the firms are losing the purposes, for consistency and uniformity across the globe, to
‘wrong’ people from audit - with the best leaving to pursue a facilitate staff mobility, to ensure appropriate levels of quality
career outwith the firms or in another service line. In addition, control and to mitigate risk. However, does the existence of such
the recruitment of more specialists is likely to have an impact on methodologies create a lack of space for auditors, in the first
this model. A change to this model, with a higher ratio of senior instance, to develop and ultimately exert professional judgement
to junior staff and the recruitment of specialists, could lead to an and scepticism? The Steering Committee is concerned that
improvement of the knowledge of business as a result of more any potential enhanced quality from recruiting and training the
senior and thus experienced staff being involved in an audit. This best individuals may get subordinated to the requirements of
would also provide an opportunity for more mentoring of junior firm’s methodologies which in turn may constrain individual
staff – which would, in turn, provide an opportunity to educate judgement and restrict innovation and potentially inhibit issues
junior staff in handling the difficult judgemental areas and in being elevated within the firm. Audit methodologies and
business acumen etc. This however may have implications for standardisation in general may, therefore, present an evolving
the pricing of audit services and the economies of engagement, threat to the profession.
and may impact on the ability to build a strong development
‘pipeline’. The research highlights that a common feature of highly
regulated modern audits is that different parts of the audit
For all these reasons, the Steering Committee believe that firms are being undertaken by different members of the team, with
should review how they recruit, develop and retain talented different mind-sets29 - junior members of the team focussing
individuals to provide the skill needs identified in this report. on ensuring compliance with the auditing standards and
undertaking mechanistic tasks, whilst senior members of the
Standardisation team apply judgement to enable the expression of the auditor’s
opinion. If trainee staff are only involved in the ‘compliance
The research reports demonstrate the importance of auditors or more mechanistic part of audit’, how can they develop the
being able to apply professional judgement and appropriate necessary judgemental skills required if they are to stay within
scepticism to ensure the delivery of a high-quality audit. As audit and progress to more senior levels. It is also worth noting
demonstrated in chapter two of this report, it is likely that that even junior members of an audit team need judgement
enhanced levels of professional judgement will be required in skills so that they know when to escalate issues to more senior
the future if the profession is to be able to meet demands from members of the team. Also, the resultant reputation of auditors
society for further or broader assurance in the future. as ‘box tickers’ does nothing to encourage recruitment and
retention of quality staff.
Despite the existence of different recruitment and qualification
models operating around the world, not one model appears Do we currently have the international auditing standards which
to produce an obviously different outcome in terms of audit enable innovative use of technology in the modern audit, for
quality. So, if the profession is recruiting the best talent with example the use of data analytics? It is not realistic to expect
the appropriate individual skills, is there something in the way auditing standards to always keep pace with developments
in which the profession currently operates which prevents the in practice and particularly technological developments – not
quality of individual judgement and scepticism and challenge least because actual experience is necessary to inform the
coming through? limitations and risks involved in using new technologies and so
inform the development of the standards. Whilst the auditing

12
standards do not prevent firms from using data analytics in their of audit in particular. Collectively the profession needs to ‘sell’
audit, there is currently some duplication of effort as despite the story and demonstrate that the audit profession can be an
testing of an entire population of data, the standards still require exciting and fulfilling career choice. In essence, therefore, audit
further testing in order to ensure compliance with the specific should be promoted as a key specialism, involving intellectual
requirements of the standards. Thus for firms to be able to take rigour, and requiring specialist skills in the same way as other
advantage of data analytics in their audits and dispense with service lines, such as tax and corporate finance. There is an
other testing, some commentators have argued that international opportunity to promote the fact that ‘to cut it in the audit world,
auditing standards and the approach of regulators would need to one will need to be a quality operator’. This promotion needs
be updated to reflect this innovation in audit evidence. to be targeted at those already training within the firms and to
those considering a career in business or the profession. The
The Steering Committee is concerned that technology will ‘audit professional role’ needs to be respected by others within
increasingly introduce a disconnect between the way in which the firm as well as by external parties if it is to attract the best
audit has been traditionally done and the way in which the talent.
audit objective could be achieved in the future. So unless the
standards catch up and there is a transition in methodologies, Another issue which came through the research which affects
there may be an inevitable duplication of effort in audit the retention of quality staff within the audit function, is the
procedures. Whilst as explained above this is currently an issue extent to which audit is now seen as a regulatory compliance
in relation to the use of data analytics, this issue will continue to function. There is a perception amongst the Steering Committee
arise with future technological advances. This is clearly a matter that regulation can often be directed at finding where people
that needs to be debated by regulators and practitioners. have done things wrong and punishing them - rather than
highlighting good practice and encouraging its wider adoption.
However, the Steering Committee believe that if a closer This may lead to a fear of making decisions in case the wrong
adherence to a more principles or objectives-based approach decision is made and, as a result, subsequent judgement
was adopted, then auditors could use their judgement on how paralysis. Some research participants argued that this can
best to meet the core principles of an auditing standard and already be seen in the firms, with audit inspections and the
thus advances and practices, such as data analytics, which regulation burden specifically mentioned as a reason for quality
could improve the quality of an audit, could be adopted without partners and senior managers leaving the firms. Regulatory
requiring changes to the auditing standards. In this case, an approaches differ internationally, so it may be hard to generalise
auditor would (and should) be judged by whether the objective and it is notable that in the UK the FRC is currently positioning
of the standard was achieved – and not by whether every step itself as an ‘improvement regulator’, rather than a ‘punishment
in the process set out in the standard has been observed. If regulator’.
auditing standards do not develop in this way, they will continue
to be outpaced by technology and will hold back opportunities to The research and the Steering Committee recognise that
enhance the effectiveness and efficiency of the audit process. regulation has led to identifiable improvements in audit quality,
however, this unintended consequence of regulation needs to
Auditing - an attractive career choice? be highlighted and resolved – as currently this is perceived as
acting as a barrier for the profession to retain and promote the
Audit quality relies on quality people delivering the audit. The best people.
key is both to attract and to retain quality people within the audit
profession. So how can the audit profession attract and retain Concluding thoughts
the next generation?
The Steering Committee recognise that it is raising as many
In the past a professional accountancy qualification has perhaps questions as it is addressing. However, one of the aims of this
been seen as a route to a ‘good career’, with good prospects project has been to provide a platform for considered debate
and good earnings potential. And there is a perception that amongst firms, professional bodies, regulators and other
audit, rather than having its pick of talent from the profession, is interested parties.
the place where people who do not find jobs elsewhere in the
profession are left. Yet those in audit are dealing with complex If we are to achieve the audit skill set necessary for the future
clients, meeting and dealing with a large variety of people, a number of key questions need to be addressed. These are
assessing risks, making significant judgements and assisting summarised below under three broad themes.
their clients and the wider economy, and gaining valuable
experience of a variety of different businesses. The profession Motivation for change
should emphasise the wider societal contribution that audit
makes, as well as the value to business and investors. • Is there a demand for broader assurance from the
investment community? What are the costs and benefits?
The Steering Committee believe that the profession needs to • Is there an appetite for change within the professional
take this opportunity to reposition audit to the next generation by firms, the audit regulators and the corporates?
demonstrating the role which audit plays in society and changing
• Whilst the role and services provided by an auditor will
the perception of the accountancy profession in general and
evolve, an auditor cannot do everything or be an expert
13
 in everything. Is there an understanding and acceptance • How can business acumen be effectively developed at the
amongst stakeholders and society that there are limitations entry and lower levels of the profession?
to the auditor role? • How can the profession improve the perception of a career
• Who will pay for the additional cost of higher level staff and in audit and how can the firms retain some of their best
experts undertaking an audit? Or will the greater use of people in the audit function?
technology reduce the overall staff costs in audit? • How can the profession most effectively incorporate
• In an increasingly global, litigious and regulated specialists into audit teams?
environment, if there is an appetite for more forward-
looking assurance, can this be met without a change to The next chapter of this report identifies how the Steering
the auditor liability regime? Alternatively, is that change Committee believe the profession should respond if we are
inevitable – and, therefore, the consequences must be collectively to address some of these questions and the
addressed? emerging skills gap.
• If the scope of assurance changes, who will provide any
additional assurance provided? What impact will a changing
competitive landscape have on the firms and demand and
supply of assurance experts?

Compliance versus judgement

• Is regulation, in its drive to improve audit quality, actually

having the opposite effect and driving out judgement?
• Whilst a dual mind-set approach within an audit team may
be acceptable and a necessity in the short term to address
current regulatory requirements and standards, should
regulators and the profession not be working towards a one
audit mind-set which satisfies both the public interest and
the regulatory compliance requirements. Would objectives-
based auditing standards help resolve this issue?
• Can regulators accept a more principles or objectives-
based approach to standard-setting – or is political
and societal focus on being able to hold people to
account (which is facilitated by prescriptive behavioural
requirements) always going to take precedence?
• Firms are wary of not just the financial exposure but
also the reputational exposure which acts as a barrier
to innovation. Reputational risk to both individual audit
partners and firms may, therefore, inhibit the development
of audit and the use of professional judgement. How can
these risks be managed?
• How can the notion of ‘value added’ for audit and the
implications for perceived or actual auditor independence
be reconciled?

Development of individuals

• Are the statutory requirements for knowledge, skills and

values for auditors fit for purpose?
• Do the revised International Education Standards (IES1-8)
go far enough in their footprint of relevant knowledge, skills
and values?
• Can firms develop a culture that values ‘forensic’ mind-sets
that challenge and identify problems, and then escalate any
problems through the hierarchy?
• How do audit team members gain the experience
and knowledge to enable them to understand diverse
international cultures?

14
4. THE NEXT STEPS
To some the findings of the research may be no surprise, in Skills
fact to some members of the Steering Committee the research
findings were actually more positive than expected. But unless • An emphasis is needed on developing the business acumen
action is taken are we walking into a crisis - with audit becoming of audit staff and new methods of increasing business
less and less relevant, the audit profession failing to attract knowledge in audit teams should be adopted.
and retain the best, the profession being unable to deliver the
• There should be a focus on the development of IT skills
requisite skills and thus being unable to meet the demands
within audit teams to complement the use of IT specialists
of complex company audit. Yesterday’s solution will not solve
within the firms.
tomorrow’s problem. So what next?
• Further consideration is needed of the integration and
The Steering Committee recommend the following next steps: functioning of multi-disciplinary teams and the impact on
how and who the firms recruit.
Recommendations for the firms
Recommendations for professional bodies
People
• Provision of wrap around training or post-qualification audit
• A review of recruitment procedures: training to specialists to enhance their contribution to the
−− to focus on the skills identified in the research and this audit team.
report; and • Initiatives should be undertaken to change the perception of
−− to identify those with an enquiring mind and judgement audit and promote audit as an attractive career choice.
potential, and to allow those individuals to develop their • Professional bodies’ requirements at IPD and CPD need to
skills in these respects. reappraise the emphasis on:
• A re-assessment of how firms retain talented individuals
within their respective audit teams. −− understanding businesses;

• Initiatives should be undertaken to change the perception of −− psychological and behavioural skills – ‘reading the client’;
audit and promote audit as an attractive career choice, both and
within the firm and externally. −− the risks and use of technology, particularly data
• More time should be devoted to on the job training, more analytics.
direct client contact and more exposure to senior members • Professional bodies, firms and IFAC should evaluate the
of the team, difficult accounting issues and judgements. appropriateness of IES2-8.
• An acknowledgment that not all members of a team need
to be chartered accountants, instead specialists could be Recommendations for regulators and standard
provided with wrap around audit training or provided with setters
a post-graduate auditor qualification to enable them to
become more effective members of an audit team. This will • There needs to be a constructive debate on how to combine
need to include appropriate training on professional ethics. the two different mind-sets (compliance versus judgement)
which currently operate within an audit team.
Environment of the audit firm • Auditing standards should be more principles or objectives-
based. This would alleviate the problem of standards lagging
• A re-evaluation of audit firm methodologies which appear behind practice and technology.
to promote consistency over judgement and may restrict
innovation. This should be carried out in parallel with • Regulators should assess audits on whether the objective
the audit regulators to ensure that the objectives of audit of a standard has been achieved, rather than whether every
methodologies and audit inspections are aligned. step in a standard has been observed.

• An appropriate audit team and firm culture is essential • Whilst the expanded audit report has played a role in
to encourage the recruitment and rewarding of sceptical improving transparency and hopefully reducing the
individuals and to provide an encouraging and supportive expectations gap, further initiatives should be debated to
environment for the development of judgement. It is continue to educate society and stakeholders on the role and
essential that professional ethics is embedded into that scope of audit.
culture. • Whilst regulation is essential for audit quality and the public
• There should be consideration as to how the current interest, care needs to be taken that regulation does not
pyramid model will need to evolve and change. have a perverse effect on audit quality by deterring the
exercise of judgement and deterring capable individuals
from remaining within the audit profession. 15
 • Regulators should question whether current statutory
requirements for the content of the qualification of auditors
are sufficient to address the changing need for skills, as
identified in the research.

Recommendations for investors

• The introduction by the FRC of the expanded audit report

is probably the most significant innovation in auditing for
a generation. It has provided investors with significantly
greater insight into what goes on in the auditing black box.
However, for the audit of the future to evolve in the way
suggested in this report, it is essential that investors – as the
primary beneficiaries of the audit – become fully engaged in
the debate.
• The evolution of the audit is too important for investors to
remain as silent spectators. The profession, regulators and
standard-setters need their commitment to engage in a
meaningful way.

Engagement in meaningful debate

• There needs to be a willingness from the profession to

adapt to society’s changing expectations of audit and
acceptance that the ‘status quo’ is not a solution.
• All those involved in the profession need to demonstrate
its response to these issues and engage in a meaningful
debate on the way forward. This will need to involve all
stakeholders.
• The research and resulting Steering Committee report
has focused on the largest multi-national audit clients
and the largest audit firms but this is only one part of the
audit profession and market. The profession should also
investigate the issues in other tiers of the audit market and
identify whether the skills and pressure points are the same.

The Steering Committee recognise that this report, and the

underlying research reports, do not have all the answers but
hope that it is a first step in a constructive debate on the future
skills’ requirements of audit teams.

16
APPENDIX A: RESEARCH SUMMARY
In the following two sections a brief summary of the research and relationship building and marketing skills) and they
undertaken by the two research project teams and their findings should align their training and development programmes
and/or implications are outlined. For further details please see accordingly.
the full research reports, which are available on the ICAS and • Firms should offer programmes directed towards the
FRC websites.30 development of mid-career professionals with a view
to exploring their potential to develop into engagement
The capability and competency requirements partners. Firms should offer programmes directed towards
of auditors in today’s complex global business the development of professional scepticism as an attribute
environment for junior staff members and audit simulations could be
Researchers: Barac, Gammie, Howieson, Van Staden used to teach them this skill.

This project involved 84 interviews with relevant stakeholders in Educators

three countries: Australia, South Africa and the United Kingdom.
The sample was restricted to audits conducted by the Big 4 • Educators should expand their syllabi in accordance with
auditing firms for some of their largest listed company clients competency framework adaptions.
in the aforementioned countries. In addition, stakeholders who
• Educators should change their teaching methods to foster
have some oversight, public policy or educative role in audit also
learning of broad business acumen skills and include
participated in the study.
practical courses on data interrogation and analytics.

The researchers propose the following recommendations that

are aimed at ensuring that the auditors of today and tomorrow, Collective capabilities
both individually and collectively as audit teams, have the
necessary capabilities and associated competencies to deliver Audit firms
high quality public interest audits.
• The requirement for collective capabilities within more
Individual capabilities multi-disciplinary teams will involve recruiting and training
graduates who will specialise in accounting and auditing
Regulators but who will gain exposure across a range of global audit
clients. The complexity of financial services demands
• Professional competence of engagement partners specialism from an early stage.
responsible for audits of financial statements (International • Graduates should be recruited and trained within specialist
Education Standard (IES) 8) should include guidance for capabilities such as IT, valuation, actuarial work, business
mid-career professionals. This could include a standard consultancy and then subsequently develop their audit
on competence levels expected from managers of audit capability.
engagements. • Lateral hires will need to be made, bringing more senior
people with direct industry experience or key specialist
Professional bodies capabilities into the audit team.
• It is therefore proposed that there are three types of
• Competency frameworks should be adapted for the individuals who make up an audit team, some of whom
development of data interrogation and analytic skills, broad will be recruited as school leavers or at the graduate level
business acumen and forensic skills. and others will be hired in laterally. The three types are as
follows:
• CPD offerings of professional bodies should provide the
above mentioned skills. −− those with a core specialism in accounting and audit
who receive appropriate industry training and some
• Education and training models of professional bodies should,
exposure to the different specialism of relevance to the
as some already do, be adapted to include hybrid training
particular audit client;
options, allowing trainees in public practice to undergo
industry-related training periods. −− those with a core industry specialism who receive
appropriate training in audit to make their contribution to
the audit team more effective; and
Firms
−− those with specific core specialisms required by the
• Firms should revise the competency maps for individuals particular audit assignment who receive appropriate
to include the augmented capabilities identified in this study training in audit to make their contribution to the audit
(data interrogation and analytics, broad business acumen, team more effective.
project management, team dynamics, forensic skills
17
 • Need to emphasise the potential that the assurance • The expanded UK audit report should be disseminated as
environment holds therefore providing an environment that best practice and subsequently adopted on a more global
is attractive both for recruitment and retention. basis. It is noted that the IAASB has taken this forward.
• Specific training and development interventions, such • Consideration needs to be given to the appropriateness
as mentoring and coaching should be introduced for the of the current regulatory regime to evaluate whether the
development of potential engagement partners for multi- perceived current checklist approach is in fact in the best
national clients in complex industries, thereby expanding the interests of audit quality.
pool of engagement partners to lead such audits.
• Achieving compatibility and cohesion within such a diverse Regulators, professional bodies, audit firms and global
team will necessitate a cultural shift in attitude by the firms business
to accommodate this new structure. Partners will also need
training in how to manage the inevitable change in team • There is a need to work together in a cohesive manner to
dynamics that are likely to result from this change. have a constructive debate about the future of audit.
• Firms’ structures, operational and financial business
models should be aligned with the suggested strategy. For Firms
example, firms will have to consider whether expert team
members should be situated in their consultancy/advisory • Firms should ensure capability needs are met by their
or assurance divisions and how that will impact upon the business models taking into account the following future
structuring of their internal groupings, their engagement expectations:
team planning, as well as their training and recruitment −− increased competition due to higher levels of rotation
practices. and retendering;
−− increased risk complexities and globalisation of business;
Professional bodies
−− increased complexity of financial reporting standards;
• Professional bodies could offer conversion programmes to −− embedding the application of technology and data
provide the wrap round training for those individuals who analytics in audits;
have developed their ‘specialism’ outside of the audit and
−− adding value by providing wider assurance on client’s
accountancy specialism route the opportunity to acquire the
business models and risks;
audit skills and competence that would make them suitable
members of audit teams. −− being more forward-looking, predictive and warning of
corporate collapses; and
Regulators and professional bodies −− improved audit efficiencies requiring more reliance on
other assurance providers.
• Guidance should replace the auditing-is-only-done-by-
auditors mentality with a more inclusive approach by • Consideration needs to be given to firms’ audit
providing requirements for a mutually supporting team of methodologies, adapting them to promote fully integrated
multi-disciplinary specialists. audits and discourage parallel audits (i.e. a compliance
• Guidance and standards, in particular ISA 220, should be and a judgement audit), thus capitalising on the training
revised to include factors to consider for the composition of and development opportunities offered by integrating more
an appropriate audit team. junior staff on the assurance aspects of the audit in addition
to the regulatory aspects.
• Guidance and standards, in particular ISA 620, should be
revised to provide clarity on experts’ responses to assessed
risks.
• Consideration needs to be given to the impact of the
proposed strategy on current developments in the audit
landscape, including suggestions of audit-only firms.

Audit report and scope

Regulators and professional bodies

• There is a requirement to be more pro-active in articulating

in a public forum the roles and responsibilities of auditors to
narrow the still evolving expectation gap and increase the
public profile of the profession.

18
Skills, competencies and the sustainability of the Interactions with stakeholders and society
modern audit
Researchers: Turley, Humphrey, Samsonova-Taddei, • Satisfying the requirements of regulation – The dominance
Siddiqui, Woods, Basioudis, Richard of a compliance mind-set is detracting from the
development of other important judgemental skills.
This project involved a series of focus group discussions • Governance contribution – High quality communication with
across several European cities. The European locations those charged with governance can make a considerable
(Paris, Stockholm, London, Edinburgh, Brussels, Dusseldorf difference to audit effectiveness but the requisite
and Birmingham) were chosen to capture a wide range of interpersonal skills place additional pressures on audit
viewpoints and experiences. Focus group participants included recruitment and training.
individuals from a variety of relevant backgrounds: audit partners
• Value to the reporting entity – The capacity for auditors
in public practice, audit committee members, users of financial
to develop and demonstrate suitable understanding of the
statements, regulators and audit quality inspectors, academics,
entities they audit is advocated as being essential to the
and early career accountants in practice.
development of auditor insight and respect. Commercial
pressures on audit fee margins, regulatory restrictions on
The approach adopted in this study centres on discussing the
auditor-client relationships and the intangible nature of audit
overall competence and sustainability of the audit function
quality are all factors capable of being cited as impacting on
rather than defining a specific schedule of skills or a new
the ‘value contribution’ of audit.
competency framework for auditors. The analysis in this report
uncovers a series of significant ‘pressure points’ for auditor • Communication with stakeholders – How can developments
skills and competency. Eleven pressure points, discussed in four to enhance the quality of auditor communications succeed?
categories, are identified as being important for effective auditing
in the current and likely future environment. These are: The following challenges are identified, which the authors argue
should be confronted if auditing is to have a sustainable future
The context of the specific audit engagement and be regarded as a valued and highly skilled function relevant
and appropriate for the demands of the modern, 21st century
• Understanding the complexity of modern business – The business environment and broader society:
auditor’s ability to understand the business is critical.
• Accounting complexity – Developments in financial Conceptualising the audit as a skilled,
reporting have given rise to concerns that ’the auditor is no judgemental activity
longer the accounting expert’.
• Continuing to make more visible the nature and value of the
• Systems complexity – The speed, complexity and
exercise of professional judgement.
remoteness of information processing places considerable
pressure for skills to supervise and evaluate analytical work • Developing a structure for audit skills beyond just individual
and is changing the nature of what constitutes evidence for attributes to give consideration of the contextual influences
audit purposes. on audit practice and the overall competence of the audit
function.

The development of audit personnel • Revisiting the professional and regulatory emphasis on
audit uniformity, typically represented by the notion and
• Individual professional judgement and resilience – The insistence that ‘an audit is an audit’, in order to give due
ability to exercise professional judgement and possessing recognition to the fundamental, idiosyncratic essence
‘soft skills’ such as psychological awareness and courage of audit and the acceptability of variation in the ways of
are widely seen as critical for auditing, but the routinisation meeting/being compliant with ‘standards’.
of audit processes and reliance on checklists can
undermine the development of the quality of judgement Recruiting and developing suitable audit
required. professionals
• The development of staff and partners – How can firms
ensure that it is the best quality auditors who progress to • Ensuring that generic firm recruitment processes
senior positions and partnership? sufficiently reflect the necessary attributes that are specific
to audit.

Firms as suppliers of audit services • Enhancing the nurturing of the development of relevant
disciplinary expertise in ways that prioritise intellectual
• Recruitment and retention of suitable staff – The loss of curiosity and not just technical compliance.
attraction of auditing as a destination career. • Reviewing the manner in which softer skills (such as
• The place of audit in multi-service professional firms psychological awareness and interpersonal capabilities) are
– Auditing has become less identifiable as a defining developed and assessed through education, training and
characteristic of the firms. experience.

19
 Managing the delivery of the audit as a
professional service

• Ensuring that audit teams exhibit a collective competence

that goes beyond the generic standards and skills required
of each individual auditor.
• Recognising that the overall effectiveness and sustainability
of audit depends critically not just on the people employed
as auditors but also on the structures within which such
auditors work.
• Re-asserting the importance of auditing and associated
skills and competencies to the identities and defining
characteristics of professional firms and in relation to
professional career development paths.

20
ENDNOTES

1 Forbes Insights (2014), Future role of audit: A more 6 Treasury Select Committee (2009), Ninth Report, Banking
insightful audit for a more complex world, Research report Crisis: reforming corporate governance and pay in the City,
for the Global Public Policy Committee (GPPC). May 2009, available at: http://www.publications.parliament.
uk/pa/cm200809/cmselect/cmtreasy/519/51902.htm.
2 An open call for research was issued and following a 7 European Commission (2010), Green Paper, Audit Policy:
number of applications the following teams were selected Lessons from the Crisis, October 2010, available at: http://
to undertake two complimentary projects, using different ec.europa.eu/internal_market/consultations/docs/2010/
research methodology and locations, to address the audit/green_paper_audit_en.pdf.
research question. The two teams were as follows: 8 Directive 2014/56/EU amending Directive 2006/43/EC
· Karin Barac (University of Pretoria), Elizabeth Gammie on statutory audits of annual accounts and consolidated
(Robert Gordon University), Bryan Howieson (University accounts and Regulation 537/2014 on specific
of Adelaide) and Marianne van Staden (University of requirements regarding statutory audit of public-interest
South Africa). entities, available at: http://ec.europa.eu/finance/auditing/
reform/index_en.htm.
· Stuart Turley, Christopher Humphrey, Anna
Samsonova-Taddei and Javed Siddiqui (Manchester 9 Financial Reporting Council (2014, 2016), The UK Corporate
Business School), Margaret Woods and Ilias Basioudis Governance Code, available at:
(Aston Business School) and Chrystelle Richard, https://frc.org.uk/Our-Work/Corporate-Governance-
(ESSEC Business School). Reporting/Corporate-governance/UK-Corporate-
Governance-Code.aspx.
3 The questions of specific interest to ICAS and the FRC and
outlined in the initial call for research were: https://www.frc.org.uk/News-and-Events/FRC-Press/
Press/2016/April/Revised-UK-Corporate-Governance-
· What is required of auditors today and what are they
Code,-Guidance-on.aspx.
responsible for?
10 Competition and Market Authority (2014), Statutory Audit
· How do they currently deliver what is required of
Services Market Investigation, available at: https://www.
them and what should they be doing that they are not
gov.uk/cma-cases/statutory-audit-services-market-
currently doing?
investigation#orders.
· What skills and competencies are needed in order for
11 Financial Reporting Council (September 2014), ISA (UK and
auditors to execute a high quality audit?
Ireland) 700, The independent auditor’s report on financial
· Is there a need to reconsider the staffing model for statements, available at: https://www.frc.org.uk/Our-Work/
the audit of complex businesses to incorporate, for Publications/Audit-and-Assurance-Team/ISA-(UK-and-
example, individuals with relevant business experience Ireland)-700-The-independent-auditor’s.aspx.
within the audit team and, if so, what are the training
12 Financial Reporting Council (2015), Extended auditor’s
implications thereof?
reports: A review of experience in the first year, March
· Is there a gap between firms’ existing competency 2015, available at: https://www.frc.org.uk/Our-Work/
frameworks for auditors and the skills needed to Publications/Audit-and-Assurance-Team/Extended-auditor-
achieve audit quality? s-reports-A-review-of-experience.pdf.
· Are the recruitment models and development Financial Reporting Council (2016), Extended auditor’s
processes of the modern audit firm adequate to reports: A further review of experience, January 2016,
address future needs? available at: https://www.frc.org.uk/Our-Work/Publications/
4 DeAngelo, L. E. (1981), ‘Auditor size and audit quality’, Audit-and-Assurance-Team/Report-on-the-Second-Year-
Journal of Accounting and Economics, 3(3), 183-199. Experience-of-Extended-A.pdf.
5 The research reports are available at icas.com and 13 IFAC Reporting on Audited Financial Statements – New
frc.org.uk. Details below: and Revised Auditor Reporting Standards and Related
· Barac, K., Gammie, E., Howieson, B. and Staden, M.V. Conforming Amendments, available at: https://www.
(2015), The capability and competency requirements of ifac.org/publications-resources/reporting-audited-
auditors in today’s complex global business environment, financial-statements-new-and-revised-auditor-reporting-
ICAS and FRC, Edinburgh. stan#node-32595.
· Turley, S., Humphrey, C., Samsonova-Taddei, A., 14 The Companies Act 2006 (Strategic Report and Directors’
Siddiqui, J., Woods, M., Basioudis, I. and Richard, C. Report) Regulations 2013, available at: https://www.gov.
(2015), Skills, competencies and the sustainability of the uk/government/uploads/system/uploads/attachment_data/
modern audit, ICAS and FRC, Edinburgh. file/206241/bis-13-889-companies-act-2006-draft-
strategic-and-directors-report-regulations-2013.pdf

21
 15 Financial Reporting Council (September 2014), Guidance matters, and Board diversity and one of the member state
on Risk Management, Internal Control and Related Financial options is whether there should be assurance around the
and Business Reporting, available at: https://www.frc. non-financial statements.
org.uk/Our-Work/Publications/Corporate-Governance/ 26 ICAS (2016), A professional judgement framework for
Guidance-on-Risk-Management,-Internal-Control-and.pdf. financial reporting: An international guide for preparers,
16 Financial Reporting Council (2014), The UK Corporate auditors, audit committees, regulators and standard setters
Governance Code, September 2014, available at: https://frc. across business and not-for-profit sectors, ICAS, Edinburgh.,
org.uk/Our-Work/Publications/Corporate-Governance/UK- available at: icas.com.
Corporate-Governance-Code-2014.pdf. 27 ICAS, in its 2015 publication The Power of One, emphasises
For a review of the impact of the implementation of the importance of the individual accountant and states that
FBU see Fraser, I. and Lee, B. (2016), Fair, balanced no matter the career stage or level of seniority, every CA
and understandable: Enhancing corporate reporting and can have a strong role in shaping the culture and values of
assurance?, ICAS, Edinburgh, available at: icas.com. the organisations in which they work, available at: icas.com.
17 The framework is available in the latest IAASB Handbook 28 EY announced in 2015 that in the UK students will no
of International Quality Control, Auditing, Review, Other longer be required to have a minimum of 300 UCAS points
Assurance, and Related Services Pronouncements, available (equivalent to 3 B’s) and a 2:1 degree classification to make
at: http://www.ifac.org/publications-resources. an application. Instead, EY will use a new and enhanced
18 The International Accounting Education Standards Board suite of online ‘strengths’ assessments and numerical tests
(IAESB) is an independent standard-setting body that to assess the potential of applicants for 2016.
serves the public interest by establishing standards in the 29 In the research this is often referred to as performance of a
area of professional accounting education that prescribe parallel audit.
technical competence and professional skills, values, ethics, 30 The research reports are available at icas.com and
and attitudes. The education standards are included in the frc.org.uk. Details below:
Statements of Membership Obligations produced by the
· Barac, K., Gammie, E., Howieson, B. and Staden, M.V.
Board of the International Federation of Accountants (IFAC).
(2015), The capability and competency requirements of
For further details, visit http://www.ifac.org.
auditors in today’s complex global business environment,
19 For further information on current developments in this ICAS and FRC, Edinburgh.
area please see the work of the Natural Capital Coalition:
· Turley, S., Humphrey, C., Samsonova-Taddei, A.,
www.naturalcapitalcoalition.org.
Siddiqui, J., Woods, M., Basioudis, I. and Richard, C.
20 For further information on the IIRC see: http:// (2015), Skills, competencies and the sustainability of the
integratedreporting.org. modern audit, ICAS and FRC, Edinburgh.
21 For further information, please see the FRC ‘Confidence in
Audit’ survey: https://frc.org.uk/News-and-Events/FRC-
Press/Press/2016/July/Confidence-grows-in-audit-but-
more-needs-to-be-do.aspx.
22 For further details, please see: https://www.frc.org.uk/Our-
Work/Codes-Standards/Corporate-governance/Culture-
Project.aspx.
23 Forbes Insights (2014), Future role of audit: A more
insightful audit for a more complex world, Research report
for the Global Public Policy Committee (GPPC).
24 This finding is also replicated in recent ICAS UK based
research on the implementation of the ‘fair, balanced
and understandable’ requirement introduced by the
FRC. See Fraser, I. and Lee, B. (2016), Fair, balanced
and understandable: Enhancing corporate reporting and
assurance?, ICAS, Edinburgh, available at: icas.com.
25 In the UK the Department of Business, Energy & Industrial
Strategy is currently consulting on the UK implementation
of the EU Directive on disclosure of non-financial and
diversity information. The Directive introduces European
wide disclosure requirements for environmental, social,
employee, human rights, anti-corruption and bribery

22
CONTACT US

ICAS
t: +44 (0) 131 347 0237
e: [email protected]
w: icas.com

FRC
t: +44 (0)20 7492 2300
e: [email protected]
w: frc.org.uk
CA House 21 Haymarket Yards Edinburgh EH12 5BH 8th Floor 125 London Wall London EC2Y 5AS
[email protected] +44 (0)131 347 0100 icas.com [email protected] +44 (0)20 7492 2300 frc.org.uk