While attention has naturally been most focused on the large end of the audit profession, which is involved with the banks and other major financial institutions, there are also important issues at the smaller end of the audit market. Given the removal in recent years of the statutory audit requirement for many entities with turnover below £6.5m, audit is increasingly a voluntary exercise in this sector and so needs to demonstrate the value it brings to business.

In its new policy paper, entitled Restating the Value of Audit, ACCA argues that against this backdrop of change, it is vital for the accountancy profession to re-examine the role of audit and to question whether a sufficiently strong case is being put forward for the benefits that audit can provide to businesses, the economy and society. We firmly believe that audit has a key role to play as a source of public confidence in financial reporting but note that there is currently little published research which seeks to demonstrate the value of audit in promoting business trust.

ACCA is seeking to change this situation by holding high-level roundtable events on the future direction of audit in a wide range of markets, and having recently spoken with influential accountants and other business leaders around the world we put forward the following agenda as a contribution to the ongoing debate.

Firstly, while we reject claims from those critics who argue that the audit model is broken, we propose that the profession should develop approaches in respect of larger entity audits which pay more heed to the needs of a wider circle of stakeholders than simply current and future investors, and hence meet better the demands of the market. This, we believe, will be achieved by extending the scope of the audit from giving an opinion on financial statements alone to engaging on issues such as risk management, the effectiveness of corporate governance, and testing the assumptions around an organisation's business model and its likely sustainability.

Auditors currently give no view on the business model, and some participants who spoke at last year's UK Treasury Select Committee inquiry into the banking crisis insisted that to do so was not part of an auditor's remit. They are right - it isn't, currently - but there is no reason why it should not be. Many spoken to by ACCA believe that communications with boards include commentary in this area anyway, so why not make it official and open? If auditors were able to engage properly with the business model, allowing them to test its assumptions, via the re-introduction of the Operating and Financial Review (OFR) which allowed businesses to set the risks and sustainability of that model, real value would be added to audit. 

Would auditors be up to the job? We believe they would - it should not be forgotten that the same firms regularly take on a wider approach to the auditing of public sector bodies, where they report not just on the financial statements (as most bodies provide services rather than make profits) but also cover corporate governance and, in the UK, efforts by their clients to secure value for money for the taxpayer. Of course sophisticated and complex business models in the largest global companies create challenges for auditors, and any expansion of the auditor role would mean that the liability issue has to be addressed. But a way can and must be found to do this.

We agree with Steve Maslin, chairman of the Partnership Oversight Board at Grant Thornton in the UK, who predicts that 2010 will see a renewed focus on the OFR, given the increasing debate around improved information by preparers on risk management and provision of assurance around those disclosures. The OFR was proving a valuable vehicle of broad-based and forward-looking reporting and ACCA believes it should never have been removed, suddenly, by the UK government in November 2005 on the grounds of removing business burdens. Such precipitous decisions merely highlight why the profession needs to restate the value of audit more clearly. 

While of course forms of reporting must be appropriate to size and complexity, we believe that assurance can add value to all businesses to instil and maintain confidence and trust among their many stakeholders and to identify where there are areas for enhanced business performance. At the smaller end of the market, a continued drive should be made to establish appropriate segmentation of services for the benefit of small businesses. New forms of assurance will continue to emerge, some driven by regulation and others by voluntary means and market demands. But the underlying essentials of assurance, that of bringing an independent and quizzical assessment of a business, will continue to add value to SMEs as they emerge from the economic downturn and help provide confidence in obtaining access to finance.

Audit-type skills are intrinsic to the training of a professional accountant, providing insight and experience of business models and engendering values of professional scepticism and independence of thought which enable accountants to advise businesses well. 'Unbundling' the audit product from its lengthy checklists, where appropriate, could be a key to providing assurance and business confidence in areas of particular concern or risk according to the needs of the individual company. Procedures could be agreed with audit-exempt businesses, which would add value by exploring areas of concern or risk to management.

It is this sort of innovative approach to the requirements of business which will maintain the value of audit. New value propositions that are driven by market demand will be more enduring than those that cling on to regulatory or statutory backing for their existence. The profession can best face down the sceptics by being bold, progressive and establishing new assurance offerings which meet the needs of businesses, stakeholders and wider society. It is important that it does, because the economy needs the confidence that audit can engender. It is now down to the profession to demonstrate that value.

Download a copy of Restating the Value of Audit 

Ian Welch
ACCA head of policy
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