Around one-third of audit committee chairs (32%), 21% of investors and 16% of finance directors have expressed concerns about auditors’ ability to detect signs of financial distress and going concern issues, according to a new report published by the Centre for Public Interest Audit (CPIA).

The CPIA is a new research and policy institute with a focus on shaping best practice in audit and influencing the future of public interest entity (PIE) audit in the UK. Its Audit Trust Index, launched today, will track perceptions of audit trust and identify emerging trends in the audit profession. UK equity investors and FTSE 350 finance directors, and audit committee chairs were surveyed for the report.

Generally, the report paints a positive picture, with 94% of audit committee chairs, 86% of finance directors and just over three-quarters (77%) of investors reporting satisfaction with overall audit quality. But for a significant minority, concerns about going concern and detecting financial distress persist.

The various stakeholder groups also identified areas of improvement:

• Increased transparency between auditors and stakeholders would have the greatest impact on audit value (investors and audit committee chairs).
• Clearer reporting on key judgements and risks, and real-time reporting of issues, are primary drivers for increasing audit value (finance directors).
• Assurance is more important than financial and non-financial business model risks - one of the top three factors that enhance audit value for users of corporate information, and for society at large (audit committee chairs and finance directors).

“The overall high satisfaction levels with audit quality and value are encouraging,” says Baroness Ford, Chair of the CPIA. “However, it is concerning that there remains a lack of confidence among audit committee chairs, in the auditor’s ability to identify signs of financial distress.”

This is a critical area that the CPIA is focusing on in its research, Baroness Ford explains, including how directors and auditors can provide better visibility on corporate health indicators.

“As a next step, we will bring together audit committee chairs, alongside other key stakeholders from across the FTSE 350, to better understand these concerns and determine how we can take collective targeted action to strengthen confidence and achieve better outcomes in this area.”

Audit committee chairs were also more likely to express dissatisfaction with the value of external audits (22%), compared with 6% of investors and 2% of finance directors.

While more than half of investors find audit reports to be very clear and informative, 40% describe the reports as being somewhat clear and informative, suggesting room for improvement.

Auditor independence

Investors showed the highest level of uncertainty around auditor independence – 15% were either not very confident or not confident at all that auditors are maintaining their independence and objectivity during the audit. Overall, however, trust in auditor’s independence was high: 94% of finance directors and 84% of investors provided positive feedback. The CPIA has said it will seek to address and examine concerns around conflicts of interest to ensure it does not erode trust.

Assurance on fraud risk

A minority – 15% of investors and 14% of finance directors – neither agreed nor disagreed that auditors responded well to fraud risk. While the primary responsibility for the prevention and detection of fraud rests with management and governance of the business entity, the auditor should provide reasonable assurance that financial statements are free from material misstatement due to fraud.

“Despite progress over the past six years, gaps between expectations and outcomes on audit remain evident, as highlighted by areas of discord in our study,” says Katie Canell, Interim Executive Director, CPIA. “We want to use our voice to constructively challenge the status quo from a position that is both deeply and diversely informed across the PIE audit profession for the benefit of all stakeholders.”

Audit plays a critical role in the UK’s capital markets by underpinning confidence in Britain’s largest companies and shaping investor decision-making, Canell concludes. “We’ve seen firsthand how high-profile corporate failures have shaken this confidence, underscoring the need to better protect financial stakeholders and society.”