Would external audits become harder?

One of the other consequences of the pandemic is that external audits may be harder. I will not be surprised to see more scrutiny in auditing firms after COVID. Two elements force to reconsider audits. The first one is COVID. The lockdown will increase uncertainty in judgement calls. The second one is the WIRECARD incredible story, the best business case one could imagine. These two elements will explain more focus on audits. I am convinced auditors will find it harder than ever to judge that companies can continue to trade, and their accounts are free from fraud or errors as businesses face tougher restrictions this Fall amid rising coronavirus infections. It is challenging for auditors with dumped fees, with so much uncertainty, to exercise cautiously and professionally their reviews.

I have a lot of sympathy for auditors as their job will become harder than ever. The judgement calls will make their reviews more difficult. The second reason explains why the audit profession is facing intense scrutiny over the quality of its work after this series of accounting scandals, including WIRECARD, CARILLION, NMC, THOMAS COOK and few others. We al know that big fours have been accused of failing to identify red flags, in several businesses. Shareholders have lost billion in companies collapses because of weak audits. The separation of audit and advisory may be the main change like commercial banks and investments banks after the 1929 crisis. It may increase quality and, I am afraid pricing of audit reviews. This Winter season may be tough for these auditors who will be under pressure and will have to audit from home companies. Good luck! I can imagine that auditors, because of the second phases of lockdown in some European countries, will have to carry out a crucial part of their duties and inventories remotely. It will add further complications to their checks of the books, where in some circumstances and fraud cases they have proved that even a local “physical” audit (on site) was not sufficient to prevent incidents. With increasing indebtedness level of many corporations, with many companies in trouble and with losses, audits are more than ever essential to ensure comfort for investors. When you invest in a WIRECARD like company, you hope that the audit review has been efficiently and cautiously done. Who could claim the auditors of this German payment company did their job properly? It was so big and so obvious…and despite the FT alerts no one reacted, including the supervisors in Germany. The trust in audit is vital for investors. If you cannot rely on the big fours review, you will not invest anymore in equities. I am not sure a ZOOM audit review will be as efficient as an on-site review. The review from auditor’s side will also be fragmented as made from home. The coordination may be missing. Furthermore, mass remote working and financial pressure on business have increased the risk of fraud. We all hope that auditors will improve their fraud-detection methods and tools. The auditors will be under extremely strong pressure to identify potential problems and to qualify accounts when necessary. To get a sign-off of its accounts, we can easily imagine that each company will have to accept closer review from auditors, more questions and obviously more challenges on ways to account operations for. In my opinion, the best remedy would be a much higher rotation of auditors even every three years or less. After a while, they sometime forget to challenge their customers. When audit fees are lowered, the quality of auditors may also be lowered. It seems crazy and no one would confess it. However, it is true: if you pay more, your audit quality services will be better. Why challenging costs when they are related to an important risk issue? Bigger fines on audit firms will help increasing audit quality and scrutiny. Fines of auditors look in general ridiculous compared to their turnover. Eventually, the supervisors should also be fined to force them to better control audit firms. The ESMA report on WIRECARD is interesting and we hope it will drive to proportionate sanctions. If not, do not be surprised to discover further WIRECARD, as we faced L&H, Worldcom, Moneytron, Ashanti, and many others in the past.

The last consequences can be higher audit fees: if they separate audit from advisory, it will negatively impact audit fees and if they need to increase accounts scrutiny, with more risks, auditors will dedicated larger teams to review accounts of their customers. This increased focus will mean more audit fees. Therefore, each MNC must be prepared to pay more for external audit reviews and to face more questions and to be challenged on the way they book operations. Life of CFO’s will become more complicate in the interest of all investors.

Fran?ois Masquelier – SimplyTREASURY November 2020