Chasing audit quality

The accountancy profession continues to struggle to demonstrate the value of audit to the wider world. Like the activities of boards of directors, audit is opaque: the title of Beattie, Fearnley and Brandt's prize-winning book on audit "Behind Closed Doors" was well chosen. If it is difficult to show what auditors actually do, it is even more difficult to assess the quality of what they do.

My recent reading has pointed up two rather different approaches to this problem, a difference which underlines the worrying gap between academic research and practice. Academics investigating the relationships which might affect audit quality use proxies for audit quality such as abnormal accruals. There is a sizeable literature dating back to de Angelo's widely cited paper published in 1981. This is a useful overview from 2004.

A practitioner reviewing some proposed research in this area recently observed: "..it has always been slightly unclear to me how you can establish an appropriate proxy for something that has itself not been clearly defined, and for which no agreed methodology of assessment has been developed."

The FRC seems to ignore all this and takes a pragmatic approach, well illustrated in the recent practice aid for audit committees, developed thus:

"The FRC organised five roundtables where an approach to assessing the effectiveness of the external audit was field tested, with a focus on audit quality and the financial statement process. The roundtables included key market participants relating to companies with a UK Premium listing – including audit committee members, investors, financial management and auditors, who gave feedback on the proposed approach, and shared some of their own experiences and expectations."

This would not pass the tests of rigorous empirical research (but is there any such thing? Paul Williams examines it here) but it has generated an analysis of the potential components of audit quality which recognises the subjectivity and judgement involved in its assessment but still offers a practical way forward.

Accounting academics are subject to all sorts of institutional constraints which militate against producing studies which could be of practical help to practitioners: they often complain that access to people is difficult, making ethnographic approaches, which could provide insights into behaviour, too problematic to undertake. But the fundamental questions which interest each group are the same. It would be in everyone's interests to bridge the gap.