How do we assure the use of the word “audit”?

Continuing the series on hopes I had for XBRL: “using technology to make clearer and differentiate the role of the auditor and the role of management.”

This will take me more than one blog entry.

As I wrote back in August, one of my goals was:

Separating management’s responsibility from the auditor’s responsibility (from third party overlay, such as an analyst) clearly and through abstraction rather than physical binding.

To speak to that, I’d like to split things up in pieces.

First, I want to speak here a bit about confusion on what audit and assurance are, and some expectations on what auditors do. In an upcoming entry, I’ll speak about how people blur the responsibilities of management and auditors, and some ideas people have about that.

Finally, I will cover how I hoped XBRL would take us from a paper-paradigm auditor’s report bound in with management’s assertions to logically and securely bound, but physically and clearly separated, communications.

The words audit and assurance are not exclusively owned by the accounting profession, but other interpretations are sometime applied to what (financial statement) auditors do. How do we clear up understandings, especially with claims that blockchain makes auditors obsolete?

Audit is a widely used term. In college, you might audit a college class. That is a lower level of responsibility than full participation, say we in North America, where no grade is assigned. 

Requiring more rigor, auditors who must undergo a training and certification process may assess your ISO 9000, 14000, 22000 or 27000 compliance, related to quality management, environmental management, food safety and security, respectively. However, attending 2 to 5 days of courses and sitting for an exam barely compares with the rigors of becoming   financial auditors. 

Along the same lines, assurance services mean one thing to accountants, but “assurance firms” in some regions are the equivalent of insurance firms in North America: AXA Insurance in North America, AXA Assurance  (et Banque) in France. 

It’s understandable that people have little idea what financial auditors do. Here are two of the misunderstandings I hear the most:

- Count cash.
- Make sure individual transactions are “right” and then re-add up the numbers.

In the world of Blockchain, the word “audit” is thrown around with carefree abandon. One article speaks to how the major audit firms and banks in a particular country will be performing the audit using blockchain … however, all they are doing is minimizing the need for bank confirmations – counting cash, if you will. Others say that auditors will no longer be necessary because anyone can recalculate an ending balance … minimizing the need for recalculation as just one possible procedure to obtain audit evidence, but missing the bigger picture. (The objective of the auditor is to design and perform audit procedures in such a way as to enable the auditor to obtain sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to base the auditor’s opinion.)

The flip side is that many people assume that auditors are examining every individual transaction, and verifying that any summarization and aggregation of the information pertaining to transactions is “correct” to the utmost detail. 

In my next entry, I will speak to this flip side, and why people expect it; some cynics would say no one trusts management to be honest in the first place, and so it is up to the auditors to make sure every transaction is recorded correctly, and that everything is correct from beginning to end.