Audit Quality in Asia: Competition, Talent, and Innovation

Transcription

1 Audit Quality in Asia: Competition, Talent, and Innovation Speech at the 19th CAPA Conference 2015 Concurrent Session 7 Mr. Daniel Li, Senior Partner, PricewaterhouseCoopers Zhong Tian LLP (October 29,2015,Seoul) Today, the pleasure is distinctly mine to spend some time with you along with my fellow panelists to discuss the concept of audit quality. What IS audit quality? That s a difficult question to answer. A very simplistic definition is that audit quality means following professional auditing standards both in letter and in spirit. I believe audit quality is more than that it s the output of a function that has many inputs. We don t have time today to discuss all of those ingredients, so I ll focus on three ingredients of audit quality. Each of these factors contributes to audit quality to a varying degree, and each of them has the potential to subtract quality from or add quality to external audits. As said, audit quality is a function of multiple variables, as the circles on the screen show. Some of these variables are more critical or foundational, like the quality of audit team, their ethics and the way they preserve and protect independence, and the level of training and quality education they get. Other process or technology factors influence quality, such as a firm s quality control program or the level of sophistication of technology and processes. Other winds of change and forces are much broader, such as political forces, competition, and fees. Before talking about what or how, we have to discuss why. increased competition in the audit profession worldwide? Why do we see Back in the old days, audit firms used to have the luxury of waiting for the phone to ring. That was decades ago. Today, our day job includes the need to constantly chase new business, go out and seek work, and be more nimble than one s competitor. There are more than a few reasons why audit markets are experiencing greater competition. I d say a first obvious factor is the profound effect the business cycle can have. Along with the 2008 global financial crisis and aftermath came

2 a squeeze on fee revenue, which obviously forced many firms to go out and chase competitors business. Since then, we have seen many companies be able to exert continued fee pressure on firms given no or slow sales or profit growth. Closely related to this is the second input that, many management teams and boards now seek audit bidding or rotation more frequently because of corporate governance requirement, restructuring plans and more frequent accounting scandals or audit failures disclosed in the media. We can t forget that regulatory forces and public policy also have a profound effect on competition. Some territories or countries have implemented mandatory periodic auditor bidding or rotation, such as the EU and China. In China, audit bidding has now become a new norm. Worldwide, audit markets are experiencing a real trend declining audit fee levels due to increased price competition. Price competition may be good in the short run for audit clients to save some costs. However, it negatively impacts audit quality and therefore is not good in the long run for audit clients. Price competition is ultimately self-defeating for the profession as those who compete mostly on price must operate with lower costs or eventually cut costs. Cutting costs may increase the risk of audit failures and botched reputations. I firmly believe audit is not a commodity product. Public trust or distrust in auditors varies around the world. This itself proves an audit is not a commodity product some audits are substandard, others are standard, and many others exceed professional standards in terms of the level of diligence and care applied. Audit firms fall victim to the commodity mentality when they compete on price alone and bid with the primary objective of underpricing the competition. Our profession must do more to reverse this commodity theme and stress to stakeholders that an audit is more than a compliance exercise. Good audit teams bring sharp observations and recommendations to clients in the areas of business risks, accounting quality, internal controls, tax planning, IT structure, etc. which all add tremendous values to the audit clients. What is the fundamental value proposition or differentiating factor when bidding on audit services? It should be the audit quality. You re probably wondering how is audit quality measured from the buyer s perspective? In my experience, most clients do know the difference between a poorer quality audit and a higher quality audit. It s easy to discriminate relative quality. For example, is an audit later subject to rework upon regulatory inspection or internal review? Is the audit smoothly run with proactive communication? Is the relationship between management and the auditor respectful or combative? These various factors are easy to understand and emphasize my point clients are more often than not willing to pay more for quality as they want better, not worse. It s about getting the right dialogue started upfront and moving the fixation away from just a price. Higher fees for higher quality are a fair bargain as they better

3 compensate audit firms for the risk they face. After all, they are exposed to regulatory action and legal action. Higher fees offer the ability to continue to invest in improvements in technology, processes, and people that contribute to higher quality. The second contributor to quality I am here to discuss is TALENT. It s not just a quality ingredient - it is one of the top few influences on the long-term future of the audit profession. Today, the audit profession, in many countries, is facing increased competition from other job fields in terms of attractiveness, salary competitiveness, and appeal to younger generations. Who are our people in this profession? The millennial and later generations are now the foundation of this profession and we must cater primarily to them. It is often the case, especially in large accounting firms that the average employee age is slightly under age 30. As the dot on the screen notes, our internal PwC network studies show 85% of our people are Generation Y (the millennials ) or younger! Several years from now, the average employee in an audit firm will start looking like someone who was born after the year Today s younger generations are very skilled with mobile technology, social media, and other regularities of digital life. Audit firms must embrace these technologies, communication tools, and ways of working to provide working environments that are attractive to the younger generations. So what do the younger generations want? Things other than just pay, such as flexibility, are increasingly important to them. The typical 8-plus hour workday, 5 days a week, does not compute for many job seekers today. This may work for a short while but it is not viable after that. Younger generations prefer more flexibility such as part-time work arrangements, telecommuting, or other alternatives. Many people enjoy staying in a field when provided the flexibility to work outside of the traditional model. For example, people in the PwC Australia firm can now work flexible hours at home or anywhere they are most productive starting this year. What can we do to create a distinctive experience to our people? Multiple personal development opportunities and a differentiating corporate culture reduce talent volatility. Particularly the younger generations are thirsty for opportunities to develop themselves and be very well-rounded. In the PwC network, we provide an environment for aspiring people to grow as leaders, even at junior levels, polish their skillsets, and build strong professional networks. This learning environment we are building focuses on programs such as cycle of experience rotations across departments or territories, supported by quality coaching. Well-rounded professionals who show appreciation to others and place teamwork as a top priority create a distinctive work experience for all. These various mechanisms increase the stability of

4 talent and therefore contribute to better audit quality. It s no surprise that millennials and younger generations want more personal development opportunities and a bigger picture strategy about how their talent fits into the organization. How do we develop talent that s fit for the challenges of the future? I m going to show you a short video about the five messages we re bringing to the younger generations to focus on developing world class talent. The third quality element I m here to discuss is INNOVATION. It s the only way our profession can stay relevant and attract the talents just discussed. Audit firms that are taking on major transformational changes will increase their productivity and improve their bottom lines while helping reduce audit risk through more effective and efficient audits. I have following five brief points to share on innovation. First technology and automation. Simply put, audit firms have moved past laptops and client-server networks. Many still rely to some extent on traditional paper files. This aspect of innovation includes mobile devices. It also includes the frontier of wearable technology. Imagine an audit team, few years from now, with Google Glasses or the next wearable eyeglass technology, using the technology to record meeting minutes for capture in the audit files. You could also imagine an auditor doing a complex physical inventory count and inputting data into his or her Apple Watch. How neat would that be? Second - migration to the cloud. Audit firms are moving beyond traditional client/server computing, where data may be in two locations. Local data give rise to a higher risk of breach and cybersecurity incidents. Many audit firms are moving to migrate more data to the cloud, which reduces both risks and costs if it s managed appropriately. Third - standardization of routine activities. Like many businesses, the audit profession has many back-office functions. Also audit itself has many routine activities such as confirmation for bank and accounts receivable balances. Wherever activities are routine and standardizable, audit firms may consider standardizing those activities and using a shared services function to lower the processing costs while improving quality benefits from standardized output. Fourth use of data and analytics. Continued advances in computing power and software allow us to take further steps in audit work. Imagine next-generation cutting edge software technology that permits an audit firm to extract all of a company s journal entry data for a year, regardless of the ERP or system it s from, and number-crunch that data to produce visualizations of journal entry activity and report to clients possibly fraudulent journal entries or fresh business and

5 financial perspectives. Fifth - better communication tools. Today, innovative communication tools are starting to make go the way of the dinosaur. Many companies are turning to internal social media as a more efficient alternative to . Other companies are using group collaboration software that allows multiple employees to work on the same document at the same time without version conflicts. These are the kinds of communication tools that the millennial and younger generations expect. To tie together these five powerful means of innovation, I m going to show you how we, in the PwC network, are bringing these transformative innovations to deliver high quality audits. In closing I d like to thank you for your time and attention for these key factors relating to audit quality and the future viability of the audit profession. I hope that you are able to connect these ideas to those raised by my fellow panelists. Thank you once again.