A closer look at the defences in disciplinary cases involving audit deficiencies by small firms
The principles of auditing are the same for large or small audits. Yet, this often seems to be overlooked when we take a closer look at the defences put forward in many of the disciplinary cases involving audit deficiencies by smaller firms or sole-practitioners.
Lacking resources is no justification for non-compliance
One common excuse put forward by auditors to justify their non-compliance with professional standards is a lack of sufficient resources to comply with the standards or the small size of their audit engagements. Disciplinary Committees (DC) have little tolerance for such defences, viewing them as auditors demonstrating a serious lack of understanding of the standards’ requirements and their responsibilities as auditors. The consequences are usually significant sanctions.
In one case the auditor blamed his substandard audit work on his small scale practice, which lacked audit staff or subcontractors to assist him. The DC concluded that constraints on human resources and time did not justify non-compliance with standards.
In a case where these issues were argued before the Court of Appeal (CACV142/2017), the judge effectively dealt with them once and for all. The judge’s conclusion was that “… whilst a failure to observe professional standards may be made more egregious when a public company is involved, it cannot be a reason for letting professional standards slip that an accountant’s firm was a small one or his clients were small companies. An accountant is accorded the privilege of practice by virtue of membership of his professional body. For that privilege, he has to comply with its standards, whether or not he considers them to be too demanding for him, and whether his firm is big or small, and irrespective of the status of his clients.”
Lack of audit procedures
We are seeing, with increasing frequency, cases where auditors issue a disclaimer of opinion without having performed the required audit procedures citing limitations imposed on the scope of the audit through lack of cooperation or a demand for cost savings from their clients. However, there is often no evidence that the auditor attempted to remove any such limitations. In substance, the auditor had misused disclaimer of opinions in order to circumvent necessary audit procedures. It is unacceptable to compromise professional standards and audit quality because of client pressure or lack of resources.
The Institute will take robust actions against such abuse of disclaimer of opinions, particularly where practical audit procedures were available but were not carried out. Referring to one such case, a DC commented that “a company and auditor cannot agree to contract out of the mandated standards simply for convenience or to achieve costs savings.”
In some cases, the respondents put the blame on the subcontractors they had engaged to perform the audit. This only demonstrates to the DC the respondents’ lack of understanding that whilst they may outsource the work, they cannot outsource accountability. Auditors are responsible for ensuring that subcontractors perform sufficient and appropriate audit work and are responsible for overall audit quality.
The purpose of audits
The underlying issue in these cases is that some auditors incorrectly assume that for small audits and audit clients not all requirements of the standards apply.
This is an elementary misunderstanding of the purpose of the audit. Auditors must comply with all relevant auditing standards in order to form an audit opinion. The size of the engagement is in itself not a reason to ignore standards. Nevertheless, the extent of audit documentation may vary. The extent of audit documentation may be comparatively less for small audits but auditors must still carry out and record all necessary audit work to meet the relevant requirements of auditing standards.
There is a public expectation that all audits will be carried out at the same level of quality and DCs will apply the same level of scrutiny when assessing whether the auditors had complied with standards in an audit – no matter the audit size. A DC will decide on the appropriate sanctions which reflect the seriousness of the auditor’s failures as well as being sufficient to maintain the public’s confidence in the ethics and audit quality of the profession.
Sanctions could range from a financial penalty to a cancellation of practising certificate and in serious cases may extend to membership removal.
Avoiding disciplinary actions
To avoid disciplinary actions, auditors should appropriately assess their capacity and competence to carry out a proper audit at the client acceptance and continuance stage. If the auditor does not have the time or resources to provide a proper audit in accordance with the standards, the engagement should be declined.
Auditors should also encourage clients that are not required to use Hong Kong Financial Reporting Standards (HKFRS) to use a simpler reporting framework which would be less expensive and time consuming for all concerned. Auditors need to consider the risks that they’re taking on by accepting clients that must use HKFRS. Businesses with no public accountability that are not required to use HKFRS should use either the HKFRS for Private Entities or the Small and Medium-Sized Entity Financial Reporting Standard.
Decisions of the DCs and the Court of Appeal make it crystal clear that auditors must comply with all relevant standards, irrespective of the size of their practice or their clients. Simply put, size is no excuse.
This article is contributed by Elaine Chung, the Institute’s Head of Enforcement.