(a) Current regulatory and professional requirements

(i) Auditing standards
Both national and international bodies produce Auditing Standards. International Standards on Auditing (ISAs) are produced by the International Audit and Assurance Standards Board (IAASB), a committee of the International Federation of Accountants (IFAC). IFAC is an international organisation of professional accountancy bodies. National standard-setters are expected to aim for compatibility with ISAs as far as possible, and some (for example, Nigeria) issue their own version as ISAs. National accountancy bodies will then adopt all of the auditing standards produced by their own standard-setting body. Failure by auditors to comply with auditing standards will leave them open to disciplinary action by their own accountancy body.

Local legislation will usually require recognised supervisory bodies to have rules and practices as to the manner in which these standards are to be applied in practice. Each supervisory body will adopt auditing standards to meet local legislation, and each body will be required to have arrangements in place for the effective monitoring and enforcement of compliance with those standards. Failure to apply relevant auditing standards is a factor that a supervisory body will take into account when deciding whether persons are fit and proper to be eligible for appointment as a company auditor.

(ii) Fraud
Currently, the responsibility within a company for the prevention and detection of fraud rests with management. The auditor is not responsible for preventing fraud, but audit procedures should be designed to give the auditor a reasonable expectation of detecting any material misstatements, whether intentional or unintentional, in a company’s financial statements.

(iii) Non-audit services
There is no objection in principle to a practice providing non-audit services, but care must be taken not to perform management functions or make management decisions. The key factor is that there is no conflict of interest between audit and the other services provided.

The Enterprises Act 2019 (Act 992) states that a firm may not engage in any relationship with a client that will result in a conflict of interest between the firm and that client. This includes relationships with the client that result in the firm (or an individual within the firm) reviewing their own work, taking on a management responsibility, or acting as an advocate for the client.

The preparation of accounting records and financial statements and the design of financial information technology systems must not be performed for a public interest entity.

For non-listed companies where a practice is concerned with the preparation of accounting records for an audit client, the following safeguards should be observed:

• The service should not be performed by a member of the audit team;
• The client should accept responsibility for making all decisions;
• The practice should not assume the role of management conducting the operations of an enterprise;
• The source data for accounting entries must be originated by the client;
• The underlying assumptions must be originated and approved by the client.

Other types of non-audit work, such as valuation services and internal audit services, are prohibited where the management threat or self-review threats are too great.

Local legislation will also usually provide that an auditor may not be an officer or employee of a client company. Thus, it is necessary for the auditor to ensure that they do not make executive decisions.

(iv) Duration of appointment
The Enterprises Act 2019 (Act 992) provides that an auditor will continue in office until either they cease to be qualified, they resign in writing, their tenure ends, or they are removed by an ordinary resolution passed at an annual general meeting.

It also states that an auditor shall not hold office for more than six years, after which a cooling-off period of at least six years applies before the auditor can be reappointed.

(b) Reasons for criticism in the above areas

(i) Auditing standards
ISAs are set by the IAASB, whose members are mainly drawn from the members of the auditing profession. The local disciplinary procedures applied against an auditor for non-compliance with an auditing standard are enforced by the professional bodies of accountants. Thus, many have criticised this self-regulatory procedure, believing it to be open to abuse and lacking independence. The argument put forward is that auditing standards should be set by an independent body.

(ii) Fraud
It is quite apparent from the press and audit research that the public believes that the auditor should, and in fact does, search for fraud during the conduct of an audit. In view of the scandals over the years, the public expectation of the extent of an audit has increased. The public finds it difficult to accept that an auditor has no responsibility for the detection and reporting of fraud, especially when one sees the high social cost of recent scandals.

(iii) Non-audit services
Audit firms do not act exclusively in the capacity of auditors for their clients. Audit work is, in some cases, not the main business of audit firms. Auditors provide many other services to their clients, including tax advice, brand name valuation, and recruitment advice. Audit firms are dependent upon the fees earned from non-audit services, and this dependency can affect the auditors’ attitude to the audit. If an audit firm loses the audit, the financial loss to the auditors can be significantly more than just the audit fee if they provide other services to the client.

(iv) Duration of appointment
It has been argued that the long-term nature of the company audit engagement can lead to a loss in auditor independence due to increasing familiarity with the company’s management. In many countries, including Ghana, the audit appointment has to be terminated after a fixed number of years. If the audit appointment was for a fixed maximum period, then auditors would not be under the same pressure to maintain their client base if they know that their relationship with the company was for a limited period, and that audit appointments would be rotated.