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Samenvatting paper Auditing Research 23/24
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- Rijksuniversiteit Groningen (RuG)
Samenvatting paper Auditing Research 23/24
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Week 1 article 1: Future of assurance in capital markets (Knechel)Introduction
The text emphasizes the importance of reliable information for participants in financial markets. It
describes how the amount of available information has increased over time due to improved
regulations and technology. However, this growing amount of information has led to challenges, such
as distinguishing between good and bad information. The text notes that the role of accountancy in
improving the quality of information is being discussed, along with questions about how accountants
can add value to the market by assuring information beyond traditional financial reporting. This also
raises questions about the need for adaptation of audit practices to the changing information
landscape and how auditors will compete with other potential assurance providers.
Define assurance
When market participants consider audits, they generally understand the traditional role of auditors
in verifying financial statements for material misstatements. However, the definition of an audit is
more complex than merely examining accounts or financial situations. Auditing involves a systematic
process aimed at reducing information risk, relying on the expertise of professionals and subject to
market forces and regulations.
A comprehensive definition of an audit underscores several key aspects. Firstly, auditors focus on
reducing information risk, which extends beyond financial statements to include any information that
could impact the market. Secondly, auditors' expertise is essential, and their skill set must evolve to
encompass new types of information. Thirdly, auditing operates within regulatory and professional
boundaries, including considerations of independence and scope of service. These constraints may
influence the profession's ability to compete with other assurance providers.
Furthermore, while the audit process is observable, the actual outcome—the reduction of residual
audit risk—is uncertain and unmeasurable. This lack of observability contributes to the "expectations
gap" in auditing, where stakeholders may have differing expectations regarding audit outcomes,
especially concerning non-financial information reliability.
An Economic Imperative for Expanded Assurance
The text emphasizes the crucial role of audits in the market economy, tracing back to seminal works
in agency theory by Jensen and Meckling (1976) and Watts and Zimmerman (1983). It underscores
the enduring value of audits as evidenced by empirical research showing benefits such as risk
reduction for shareholders, lower cost of capital, and improved market efficiency. These findings
indicate that audits remain vital for market participants.
It poses questions regarding the feasibility of developing assurance services that offer significant
economic value to stakeholders. Drawing from past experiences, it suggests focusing on addressing
economically significant risks as a potential pathway to success.
The text reflects on previous initiatives like business risk auditing (BRA), noting both successful and
unsuccessful attempts. It emphasizes the importance of addressing risks with substantial economic
implications for stakeholders.
Furthermore, it highlights the role of auditors in assessing risks beyond traditional financial reporting,
such as business system controls and non-GAAP, nonfinancial information. The expansion of
assurance services could align with the increasing demand for information related to various risks,
including environmental and societal factors.
,Non-GAAP and Nonfinancial Information
The ACCA/Grant Thornton roundtable in 2016 highlighted the necessity for audit providers to adapt
to users' evolving needs for various types of information beyond traditional financial statements.
This includes non-GAAP measures, ESG reports, and cybersecurity disclosures, which have become
increasingly important for stakeholders.
Non-GAAP reporting has seen widespread adoption, with 95% of Fortune 500 companies disclosing
such metrics in 2017. However, concerns persist regarding the potential for manipulation and the
lack of transparency in these disclosures. Despite this, investors often use non-GAAP measures to
assess earnings quality and understand performance trends. Stakeholders are increasingly calling for
assurance to enhance the credibility and reliability of non-GAAP information.
ESG reporting, covering environmental, social, and governance aspects, has also gained momentum.
While it offers potential benefits like reduced cost of capital for firms with superior social
performance, ensuring the credibility of ESG disclosures is crucial to avoid "greenwashing" and
maintain investor trust. Assurance over ESG reports has shown positive impacts on stock valuations,
indicating the importance of reliable information in decision-making.
In the realm of cybersecurity, the frequency and cost of breaches are escalating, making disclosure of
cybersecurity measures essential for stakeholders. Despite the lack of standardized disclosures and
assurance practices in this area, there is a growing professional impetus to address cybersecurity risk
management, reporting, and assurance. As technology evolves rapidly, the need for assurance
related to cybersecurity information is expected to increase significantly.
A (Possible) Future of Assurance in Capital Markets
The text discusses various obstacles to enhancing assurance of information, particularly in the
context of financial reporting. These obstacles include limitations in internal processes and controls,
which hinder the ability to capture and aggregate relevant information for external reporting.
Additionally, challenges exist in terms of communication with external stakeholders and the
willingness to disclose information, often due to concerns about the return on such disclosures.
Another significant obstacle is obtaining assurance over the information provided. This involves
technical, economic, and legal constraints, as significant investments may be required to enable
assurance of a broader set of data. Furthermore, producing expanded assured information is subject
to the economics of public goods, where stakeholders may desire the information but may not be
willing to bear the cost of its production.
The text also draws lessons from past experiences, such as the challenges faced by auditors during
the implementation of SOX-mandated Integrated Audits in the United States. These challenges
included difficulties in evaluating internal controls, defining deficiencies, and ensuring adequate
expertise within audit teams.
Furthermore, the text explores the evolving role of auditors in the information supply chain,
emphasizing the need for coordination with various stakeholders and subject-matter experts. It
discusses the importance of maintaining auditor independence while acknowledging the increasing
integration of auditors within the financial reporting ecosystem.
Lastly, the text outlines the challenges and considerations for the future expansion of assurance
services into areas beyond traditional financial reporting, such as environmental, social, security, and
governance aspects. This expansion requires multidisciplinary expertise, effective verification
processes, and significant organizational support, posing challenges in terms of profitability,
sustainability, and coordination with clients and stakeholders.
,Moving forward?
Demand Sources: The expansion of assurance services could stem from regulatory mandates,
client/stakeholder demands, or initiatives by the audit profession or firms. However, relying solely on
public demand may lead to underproduction due to the public good nature of assurance.
Criteria Specification: The specification of reporting criteria influences the demand for expanded
assurance. Stakeholders, including reporting entities, assurance providers, third-party organizations,
and independent standard setters, may contribute to criteria development. Challenges such as
selectivity, consistency, and comparability may arise.
Suitability of Auditors: Audit firms possess the capability to develop expanded assurance services but
face constraints such as regulatory limitations and perceptions regarding their ability to handle
technical information. Nevertheless, they benefit from financial resources and a reputation for
independence, which may sway stakeholders to rely on them for expanded services.
Conclusion
The conclusion emphasizes the historical significance of auditing and the evolving landscape of
assurance services. While challenges persist, such as unsuccessful attempts to expand assurance in
the past, the economic imperative for the profession to embrace expanded assurance has never
been greater. Auditors are well-positioned to enhance the accuracy and reliability of information,
leveraging their verification skills across various domains. The expansion of assurance services may
be driven by market demand or facilitated by regulatory intervention. However, it necessitates
significant changes in the profession, potentially redefining the relationship between auditing and
accountancy. Ultimately, market and regulatory forces will shape the future development of
assurance services, driven by the economic, social, and political imperative to enhance information
reliability and reduce risk.
, Week 1 article 2: Audit and the pursuit of dynamic repair (Humphrey et al)
Introduction
The text expresses deep concern about the development and social significance of the statutory
financial audit, particularly in light of ongoing discussions about the audit expectations gap, major
corporate scandals, and the questioning of audit quality. Despite efforts to restore trust in audit,
criticism of the profession continues to rise, with doubts about the efficacy of regulatory reforms.
The history of audit is marked by notable failures, leading to calls for reform primarily focused on
regulatory and market structures rather than questioning the conceptual underpinnings of audit
itself. The paper advocates for a dynamic repair of audit, drawing on concepts of craftsmanship and
repair work to encourage a reconfiguration of audit beyond its traditional scope of assuring financial
statements. It proposes conceptual innovations such as expanding the objective of audit, revising the
relationship between audit and assurance, focusing on product innovation in standard setting, and
reimagining the social value of audit.
The Conceptual Nature of Repair
The text explores the conceptual nature of repair, drawing parallels between auditing and
craftsmanship. It discusses the work of sociologist Richard Sennett, who views repair as an essential
aspect of craftsmanship and human development. Sennett distinguishes between static repair, which
aims to restore or remediate an object to its original state, and dynamic repair, which involves
reconfiguration and innovation. Dynamic repair encourages imagination and experimentation,
leading to new ways of addressing problems. Sennett emphasizes the importance of tools that
stimulate creativity and intuition, enabling artisans to explore different possibilities. He suggests that
reconfiguration, the most socially engaging form of repair, offers opportunities for transformative
change. The paper argues that past attempts to repair the audit have been primarily restorative and
remedial, highlighting the need for a more dynamic approach to address contemporary challenges.
The Historically Restricted Nature of Audit Repair
Over time, audits and their regulations have undergone reforms, especially after major crises. These
reforms aimed to strengthen financial systems and rebuild trust in financial reporting. The audit's
main role has been to ensure the reliability of organizations' financial statements, enhancing
accountability between parties involved. Reforms post-1990s, particularly after crises like the Asian
financial crisis and the Enron scandal, focused on globalizing audit practices and improving clarity and
independence standards. Despite these efforts, the fundamental concept of audit remained largely
unchanged, emphasizing its role in verifying financial statements.
Recent reforms, post-2007 global financial crisis, also aimed to enhance audit quality and restore
investor confidence. However, they mostly reinforced the existing audit model without questioning
its conceptual foundations. Such reforms emphasized compliance with detailed standards but did not
explore alternative forms of audit. These efforts, termed as "static repairs" by Sennett, maintained
the status quo rather than fostering innovation in auditing.
Beyond regulatory frameworks, discussions have arisen on rethinking the audit's role and relevance
in society. Some proposed widening the audit's scope to address social issues or improving its
informational value for stakeholders. Initiatives like the AICPA's Assurance Services Committee
explored extending audit services beyond financial reporting, offering flexibility for innovation.
However, these efforts faced challenges and were not widely adopted.
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