Research carried out for the Financial Markets Authority shows 'a serious gap in the expectations of investors and what auditors are delivering'

Research carried out for the Financial Markets Authority shows that New Zealand investors lack faith and trust in auditors of company financial accounts.

The FMA said the research on perceptions of audit quality, conducted by Buzz Channel, was the first such work done for the FMA "and therefore provides a baseline measure of confidence, trust, professionalism, and perceived quality of the audit process, and the perceived benefits from a users’ perspective".

The FMA conceded that the research had indicated a serious gap in the expectations of investors and what auditors are delivering. To fill these gaps a concerted effort was needed from the audit industry to explain their work and how they operate.

The FMA conducts quality reviews of registered audit firms and issues an annual report on its findings. This is based on reviews of audit files in one year but focuses on general themes rather than individual firms. One question asked in this research was whether there was value seen in the FMA going further and publishing summary information about the findings of quality reviews of individual registered audit firms. Of those responding 69% of investors said yes, but just 27% of those in the audit profession agreed.

The executive summary on the findings of the research says the overall theme emerging from investors showed while there was a range of views, "in general there is a lack of faith and trust in the audit profession and the quality of audit in NZ".

"Overall, participants felt that the primary reason for this difference in perceptions among the key groups related to the level of involvement or ‘closeness’ to the audit process.

"Since the auditors themselves, and the managers (and to a slightly lesser extent directors) are intimately involved in the audit process and get to see first-hand the way audits are conducted, the way the auditor challenges the entity, the robustness of the discussions and debates, the quality and integrity of the auditor etc., participants felt it was not surprising these groups would trust the process.

"On the other hand, since investors do not get to see the audit process first-hand, people felt it was not surprising they were less trusting."

The summary said Investors had concerns about the independence of auditors from the entities they audit, lack of professional scepticism, and auditors not asking questions and challenging the judgement of the management and directors. In contrast the directors rated auditor independence fairly high (71% agreed).

"A lack of competition and choice was mentioned by investors, referring to a small pool of audit firms available and the big four or five organisations who have a large share of the market. Sector experience was rated as an important factor when selecting an audit firm, and this combined with a small market in New Zealand and audit companies offering other consultancy services to their audit clients was talked about as contributing to an auditor being re-engaged and building a strong relationship with the entity they’re auditing, in turn leading to a conflict of interest. This perceived lack of independence came through as a strong concern of investors and some directors."

Just over half of investors surveyed (56%) agreed they would trust the audit profession to act with ethics and integrity, while 68% of company directors indicated they trusted the audit profession. When asked the same question, 98% of auditors trusted their profession.

There was a similar gap between investors and the profession’s view of itself when asked about the independence of auditors, and their level of professional scepticism and ability to challenge management and directors in conducting their audits reviews. About half of investors (48%) thought the quality of audit was of a high standard, with more directors (57%) agreeing audit was of high quality. 

FMA Chief Executive Rob Everett said auditors had an important role to play in contributing to market integrity and informed, investor decision-making.

“While we can see that overall confidence is positive, serious expectation gaps exist among stakeholders with what they believe audit actually delivers. Our research shows that investors are not connected to the value that auditors can bring. To fill these gaps we need a concerted effort from the industry to explain their work and how they operate.

“The research also identifies the role the FMA can play to improve public understanding about the regulation and oversight of the licensed audit profession.”

The findings and insights from the survey have been provided to the industry to help auditors and audit firms improve how they provide assurance to investors.

"Investors are the end – user of audit services, in terms of the audited financial information they rely on to make informed decision about investing their money, so it’s critical for auditors to responds to investors’ expectations," Everett said. 

Buzz Channel completed the survey project between October 2018 and February 2019. This included an online survey and followed up with in depth interviews with a small sample of industry stakeholders and investors.

A total of 357 people took part in an online survey of audit quality, split between individual/professional investors, directors and audit risk committee members, managers and auditors.

Further detailed, 30-40 minute interviews were conducted with 15 people, also split between different stakeholders.