Federation University

BUACC3741 Auditing

Sofika Thapa 30131366

Binaya Raj Subedi 30131977

Due Date 22/09/17

Opportunities and Challenges for the Auditing

Profession under the Australian Auditing Model
 Opportunities and Challenges for the Auditing Profession under the
Australian Auditing Model

SYNOPSIS
The topic of this paper revolves around the challenges and opportunities facing to auditing
profession in Australian auditing model. Auditing profession in Australia has been subjected to
high regulatory and structural changes during the last two decades. After several corporate
collapses of early 2000s, government have radically increased its influence over the activities
and affairs of profession to improve accountability and disciplinary infrastructure of profession.
The role of auditors have repetitively been discussed pertaining to quality of audit services,
auditor’s independence and audit expectation gap between actual and stakeholders’ anticipatory
audit process. In this regards, loss of self-regulation rights, adherence of quality under strict
regulatory surveillance boundaries and ethical codes of conduct, auditor’s independence under
organizational and social context, lure of audit firms for increased earnings raising threat to
independence and ethical decision-making of auditors, and never-ending process of increasing
stakeholders’ over-expectations from profession are the main issues of concern for profession to
deal with. However, recent entry of Artificial intelligence and machine learning technology in
Australia has all the abilities to counter reigning challenges of the profession through its
extraordinary data accumulation, processing, analytical, validation, learning and cognitive traits
which can actually change the definition of auditing forever.

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 Opportunities and Challenges for the Auditing Profession under the
Australian Auditing Model

INTRODUCTION

Auditing profession has been a victim of continuing debate by many individuals and professional
bodies during the last two decades. With the continuously evolving business environment, not
only has the role of an auditor changed but also the expectations of stakeholders such as
shareholders, government, regulators and different other individuals has increased from an
auditor. The increasing business complexities and changing role of professionals such as
accountants and auditors, where on one side brought several challenges for auditing profession;
on other side, resulted in some opportunities for people associated with the profession. The
current setting of profession in Australia is being managed under guidelines of Australian
Auditing Standards issued by the Auditing and Assurance Standards Board (AUASB), with a
particular aim to enhance credibility and stakeholders’ confidence over financial reporting and
maintaining its homogeneity with the global auditing standards. This paper would first shed light
on the major challenges facing auditing profession in Australian environment; and then, would
consider any opportunities emerging for the profession to deal with those challenges in extensive
or absolute manner.

CHALLENGES FOR AUDIT PROFESSION

Auditing profession is currently undergoing through its most complicated stage. The ideas and
beliefs of related professionals with respect to challenges faced to the profession, relates to
completely opposite realms. Such that where one segment of auditing professionals consider
tougher regulatory infrastructure :a blessing for enhancing audit quality, the other segment voice
for the self-regulation rights of the members of this profession. One thing however is absolutely
true i.e. not only that most of these challenges facing to auditing profession in Australia are
interlinked and contingent, but the root cause of their existence are the credibility crises occurred
due to major corporate scandals of accounting and auditing in early 2000s, which resulted in the
change in overall regulatory infrastructure in Australia during the last decade. The
implementation of Corporate Law Economic Reform Program (CLERP 9) has been started by
government of Australia from June 30, 2004, comprising 41 clauses which mention about the

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 Opportunities and Challenges for the Auditing Profession under the
Australian Auditing Model

auditors’ independence, client rotation, audit quality, auditor’s liability and disclosure
requirements of financial and nonfinancial aspects of clients. It also implemented 61 Comment [E1]: In text references
required.
recommendation presented in HIH Royal report presented to government on 16 April 2003
corporate governance, reporting financial statements and audit. In short, the profession is no
longer been self-regulatory and standard setter in business environment in Australia.

Quality of Audit Services

Audit quality is by far one of the most debated topic of auditing profession. According to
DeAngelo (1981), ‘Audit Quality’ is analyzed through ‘market-assessed joint probability’ of two
distinct components:

 Likelihood that auditor uncover breach in clients’ financial statement through his
knowledge and expertise; and
 Likelihood that auditor could report the breach with complete impartiality and
independence.

As per Australian auditing model, audit quality is enforced through adherence and quality of
financial reporting standards of accounting, taxation, codes of ethics and guidance statements of
auditing (Leung, Coram, Cooper, & Richardson, 2015).The role of auditing has significantly
changed during the past decade in Australia. Previously, major activities such as setting
standards of practice, managing audit quality and conduct of auditors, were in profession’s
influence to develop and regulate. However, due to major corporate scandals of early 2000s,
level of trust on profession’s self-regulation rights have been shattered. This resulted in takeover
of regulatory responsibility from the hands of profession to government. ASIC’s Financial
Reporting Surveillance Program is a systematic approach for scrutinizing financial statements. It
selects companies through an alert and complaint mechanism; review their financial statements
for areas of potential non-compliances and its materiality; contact companies for their
clarifications about accounting treatments; if not satisfied, impose remedial actions and issue
media releases for findings summary(ASIC, n.d.). ASIC is now the primary regulator of
profession with the responsibilities of not only watch over activities of profession and
implementation of financial reporting requirements held by Corporations Act, but also to enforce

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 Opportunities and Challenges for the Auditing Profession under the
Australian Auditing Model

independence and quality among segments of profession (APPC, 2013). This development has
created significant challenge for auditing profession and people associated with it. Auditors are
now prone to public oversight and accountability by defending their judgments, being held
willful negligent for failure in every single audit procedure; and, belittlement of profession’s
members before public(Knechel, 2016). In fact, the quality of work being done by Auditor is
now being audited.

Threats to Auditor’s Independence& Ethical Values

Auditor’s independence refers to the situations where conflict of interest arises between auditor
and the entity being audited. Independence is the significant influence for auditors to comply
with the requirement of principles such as APES 110 (Code of Ethics for Professional) and other
standards. Auditor, being in an agency relationship with its principals i.e. shareholders or
investors, are required to protect the interest of its principals while keeping his personal interests
aside. There are many situations pointed by Leung et al. (2015) having potential of threat to
Auditor’s independence such as financial interest, close family or business associations,
employment relations, long-term relationship, self-review, client’s pressure due to undue
influence, etc. According to Ramsay(2001), it is responsibility of auditor to identify any threat to
his independence, evaluate their significance, and apply proper safeguards to either eliminate or
at least minimize these threats to an acceptable level. In this regards, several safeguards has been
provided by section 100.14 of APES for members of auditing profession such as continuing
educational and professional development, adherence to corporate governance and ethical
standards, etc.

Auditing profession has faced multiple failures with respect to its independence and ethical
values during last two decades. It played critical role in corporate collapse of One Tel. (2001) by:
conflict of interest and familiarity threats pertaining ex-chairman of EY; and self-interest plus
self-review failures due to average 48.25% non-audit fee charged by BDO in four consecutive
years(Monem, 2011).Although, authorities have tried their level best to immune auditing
profession against threats to independence, which has been done through introduction of CLERP
9 (2004);creation of Financial Reporting Council (FRC) for monitoring firms’ activities to ensure

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 Opportunities and Challenges for the Auditing Profession under the
Australian Auditing Model

their independence at large; and re-describing independence of auditor and emphasis on

provision of safeguarding system to ensure auditor’s independence in not undermined through
CPC F1 (APES 110), but undermining independence has still being one the prime issue of
concern for the profession. One of the most common and highly debated aspect of independence
are non-audit services and fee dependency of profession. In the presence of stringent regulatory
mechanisms of CLERP 9 and FRC, there are enough safeguards available for non-audit services
threat. Furthermore, Tepalagul and Lin (2015) even concluded ‘non-audit services’ as a factor to
improve audit quality. However, audit fee dependency has still been a compromising object for
auditor’s independence. Auditing profession has been subject to intense competition and
stagnated market during past few years which has resulted in downward pressure on audit fees.
The profession is also prone to increased globalization of business, commercialization of
practices, and stakeholders’ expectations for better quality of audit. A tension exist between the
audit services and lure of growing earnings through performance targets by the firm, which not
only jeopardize the quality of audit work but also provide grounds to members of profession
compromising their independence (Duff, 2004). On the other hand Paracini, Malsch and
Tremblay(2015)also blamed audit firm’s incentive structure for motivating auditors to breach
their independence and allowing self-interest to dictate their decision and judgments.

The focus and concerns of regulatory infrastructure is also inconsistent as regulators put
extremely little or no attention to social and organizational context of auditing profession (Sikka,
Filling, & Liew, 2009).Regulators have yet been literally failed to make realistic connections
between threats to independence and quality of audit with audit firms’ extensive lure of
maximizing profits. Only those individuals in the firm are apprehended with promotions and
pay-rises, who contribute sufficiently in firm’s profits and could facilitate the firm with its
unreasonable demands such as working late hours and weekends to complete audits with
provision of limited resources of time and money(Anderson, Grey, & Robson, 2000). Failure to
fulfill these ‘professional standards’ of audit firms, individuals either became victims of
downsizing by firm or being terminated on grounds of ‘under-performance’, thus faces a setback
to their career.

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 Opportunities and Challenges for the Auditing Profession under the
Australian Auditing Model

Audit Expectation Gap

Audit expectation gap refers to the difference between expectations of users of the financial
statements i.e. the stakeholders and the audit service actually been provided by the auditor(Leung
et al. (2015). This gap normally emerges due to distinction between reasonably achievable
targets of auditors and unreasonable expectations of stakeholders with respect to audit process.
However, Porter(1993) pointed out more realistic type i.e. Performance gap: the difference
between reasonable expectations of stakeholders and what auditors perceived to achieve. This
gap is caused for two reason: auditor’s inadequate performance and deficient standards of
accounting and audit.

For last two decades, auditing profession in Australia has been exposed to challenge of
bridging this gap between itself and society’s expectation at large. An investigation of mid-
nineties suggested that biggest reason for this gap in Australia’ was just wording used for
communication by auditor in his report (Monroe & Woodliff, 1994). However, after collapses
of HIH Insurance (2001)(Mirshekary, Yaftian, & Cross, 2005)and One Tel. (2001)(Rox,
2014), scope of gap has expanded to detailed disclosure requirements relating to internal
controls, frauds and assessment of going concern assumption. Regulators and researchers
have persistently been trying to reduce this gap through recent reform such as CLERP 9,
ASIC Surveillance program, increasing vigilance of ASX and standards modification
exercises, and some of the gap in relation to audit quality and independence do have been

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 Opportunities and Challenges for the Auditing Profession under the
Australian Auditing Model

closed. But increasing ‘expectations’ is a never ending process. Moreover, every next
corporate collapse refreshes the issue and raise need to impose more surveillance and more
regulation on profession. For instance, auditor’s role have recently been re-discussed due to
collapse of Dick Smith in 2016(King, 2016). This situation proves that stakeholders don’t
consider auditors, ‘the gatekeepers’ anymore. For them, auditors are contract killers hired for
some ‘do or die’ mission (audit), result of which has to be do (fraud detection), else they have
to die (blamed for being negligent).

OPPORTUNITIES FOR AUDIT PROFESSION

Auditing is no more the same it used to be traditionally. With every passing year, new and more
complex transactions are surfacing and to regularize those transactions, new and more technical
accounting standards being introduced by regulators. Besides, the size of enterprises and strength
of their yearly transactions are also multiplying at an alarming rate. It isn’t left easy for the
profession to keep up the pace with increased business complexity of clients. According to a
report issued by Thompson Reuters, the profession hasn’t left its outdated audit processes which
proved inefficient repetitively over the years. Moreover it hasn’t modernized itself which raises
question mark on its capabilities(Anderson A. W., 2017). Analyzing overall situation of auditing
profession in the first glance, it seems that profession is losing its importance and scope in
coming future. One of the member even declared in his speech that “auditing will not survive as
a profession” (Copeland, 2003). However, this isn’t the case at all. There is a new hope for
profession, a new opportunity, which will not only overcome all or most of the challenges of
auditing but will actually change the face of profession entirely.

Artificial Intelligence

Artificial Intelligence (AI) and ‘Machine Learning capabilities’ are described as the machine’s
capability to learn and improve its performance without requiring assistance and interference of
humans to command exactly how to fulfill tasks given by him (Macaulay, 2016).With the help of
AI in auditing profession (Cognitive Auditing), time-consuming and repetitive processes of data
acquisition and processing it into meaningful information would be a matter of minutes(Kokina

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 Opportunities and Challenges for the Auditing Profession under the
Australian Auditing Model

& Davenport, 2017). The exercises would be carried out on 100% data rather randomly selected
data. AI machines would conduct intelligent analytics, comparisons, trend analysis, data
validation and application of highly advance statistics to acquire sophisticated and highly reliable
information from clients’ financial systems. Therefore, rather working overtime and on
weekends as usual, auditor would only have to do high level analysis and investigation to justify
anomalies and abnormal variations in financial and nonfinancial aspects (Brennan, Baccala, &
Flynn, 2017), in a time efficient manner. In short, the possibilities are limitless.

Comment [E2]: Reference? What does

this mean?

Cognitive auditing has started setting footprints on auditing profession in Australia with KPMG
Australia signing deal with IBM Australia for Watson supercomputer as new ‘auditor’ of firm
(Tadros, 2016). The supercomputer would enable KPMG to conduct unlimited data analysis for
any company. Cognitive auditing is an answer to most prominent challenges of auditing
profession such as Audit quality (Raphael, 2015) and Auditor’s Independence (Agnew, 2016).
Most importantly, AI and machine learning capabilities would not only to bridge the
performance gap between profession and stakeholders’ expectations but will also help to close
reasonableness gap by meeting unreasonable expectations of society such as absolute fraud
detection or true auditor’s hypothesis about going concern assumption of client.

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 Opportunities and Challenges for the Auditing Profession under the
Australian Auditing Model

CONCLUSION

In contrast to reputational and credibility crises been suffered by auditing profession in the form
of corporate collapses in early 2000s, the regulatory structure of auditing segment in Australia
has gone way too regulatory. Behind every single corporate scandal, auditors has have to face
media trials and regulatory look over for any potential negligence and been accused for
deteriorating their quality of audit procedures or jeopardizing their independence in some
unethical fashion. Moreover, contingent to every next corporate collapse, the ‘reasonable’
expectation of profession’s stakeholders are increasing, extending the audit expectation gap more
and more. Analyzing the overall position of the challenges facing to the profession and
increasing regulatory pressure on its activities, it seems that auditor would have to shift his focus
to fraud detection and compliance rather from provision of professional judgment about any
given client. However, sustainability and importance of auditing profession can only be regain
with innovation. Artificial Intelligence and machine learning capabilities would actually change
the definition of auditing for everyone. AI would take over the technical, computational and
analytical duties of audit and it isn’t an astute task for people to challenge machine’s conclusion.
Therefore, significance of auditor’s judgment would heightened in sight of regulators, investors,
stakeholder and even the society. It would sincerely play its role in closing the ever-maintained
expectation gap between auditor and society’s expectations. Fortunately, machines are more
‘respected’ than humans anyway. So, auditing profession would definitely be going to take
advantage of the strengths and influences of Artificial Intelligence and machine learning
capabilities in coming future of Australia. Now the acceptability of AI among members of
profession and future direction of regulatory as well as stakeholders’ expectations is still an issue
of debate for future research.

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 Opportunities and Challenges for the Auditing Profession under the
Australian Auditing Model

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