The future evolution of audit

The audit function is probably coterminous with human society. The presence of auditing has been inferred from records of a Mesopotamian civilisation going back as early as 3500 BC. These records, involving financial transactions, displayed a variety of markings that may be construed as a system of verification.

Internal controls and separation of duties probably arose at the same time. Ancient Rome employed the ‘hearing of accounts’, where one official would compare his records with those of another – an applica¬tion of both separation of duties and verifica¬tion. But it wasn’t until the Industrial Revolution in Europe that auditing with characteristics similar to current auditing – that is, beyond the hearing of accounts to include verification of accounting records and associated supporting documentation – came into being.

Yet despite this long history, the purpose of audit is now in question. While there were similar periodic bouts of questioning during the corporate collapses in the 1980s and 1990s, the worldwide financial crisis of the past two years has given the issue a new urgency.

Focusing on that narrow subset of audit – statutory external financial audit of private sector entities – the evidence will be based on the UK market, although the challenges faced by the audit profession have a wider international resonance. Audit is at a crossroads and is suffering from criticisms that have plagued its practice for many years. The understandable public demand for financial reforms following the current economic recession may fundamentally recast audit into unpredictable and possibly detrimental forms for organisations and society.

Puzzlingly, for such a fundamental human function, there is little documented research on the value audit brings to society. A notable exception is Marleen Willekens’ 2007 report: The Effects of External Auditing in Privately Held Companies: Empirical Evidence from Belgium. For her study Willekens sampled 1,332 relatively small companies whose size criteria was about the legal threshold for mandatory audit in Belgium; and 6,890 companies of all sizes. It sought to test the association of submission to audit with several characteristics of benefit to civil society: a reduction in earnings manage¬ment; good tax regularisation and disclosure practices; overall financial performance results, and cost of debt levels.