In recent years, there has been a change in the markets reliance on audited information and in the nature of the major external audit firms. Concerns about the risk of audit failures, the global expansion of the major audit firms, increased complexity of both accounting standards and financial instruments, the challenges associated with fair value estimation processes, which have been amplified by the current market crisis, have reinforced markets need to be confident of audit quality.

Audit quality, from the perspective of the audit profession, is about delivering an appropriate, independent professional opinion on financial statements that is supported by the necessary evidence and objective judgments.

Management has primary responsibility for the preparation and quality of financial statements and reports, valuations and risk disclosures and for the effectiveness of related internal controls.

The auditor must comply not only with audit requirements but also with ethical requirements to ensure integrity, objectivity, professional competence and due care, confidentiality and professional behavior.

Sound audits provide a number of benefits to institutions, financial systems and the markets. Audits performed in accordance with high-quality globally accepted audit and ethics standards are critical to the appropriate implementation of accounting standards. They help ensure that financial statements and reports are reliable, transparent and useful to the marketplace. This enhances market confidence and improves the quality of information relied on.

Basel Committee on Banking Supervision of Bank for International Settlements has recently brought out a paper on External Audit Quality and Bank Supervision. Some of the key findings are listed below.

Reliance on external auditors’ expertise and judgments has increased.

High-quality audits enhance market confidence, particularly in times of severe market stress.

Most of the world’s banking assets are audited, and supervisors are increasingly reliant on high-quality audits to complement supervisory processes.

Major external audit firms have globalised and, as a result, their structures are complex and governance within the firms lacks transparency.

Basel Committee on Banking Supervision has identified certain important steps to engage in to pursue superior audit quality. They are:

Enhance promotion of sound auditing guidance and practices, enhance audit quality by encouraging clarification of accounting principles, encourage dialogue within and among audit firms to prepare for and address processes that should be conducted during future times of financial stress, enhance engagement with independent audit oversight authorities, encourage greater transparency of the corporate governance structures and the financial position of the global network firms, encourage dialogue within and among the global network firms and other relevant bodies about the challenges that the firms face with respect to audit quality in audits of banks and continue to support audit quality.

Though they are specific to banking industry application, almost all the findings are relevant in the current market place for all types of industries.

To effectively play their roles to safeguard the interests of the investors, auditors are required to Think Straight and Talk Straight. Ironically this was the motto of the firm Arthur Andersen, one of the big accounting firms accused of complicity in the Enron assignment.

Unprecedented changes in the accounting profession and professional services mean the current approaches to safeguard shareholders and other stakeholders interests of our modern global enterprise is no longer effective and efficient. Yes. Time has come to audit our auditors.

Are they ready and willing?