An increasing number of companies in Estonia cross the threshold of turnover and balance sheet volume that requires them to order an audit or financial review of their 2021 annual report. On the other hand, the number of auditing companies has decreased compared to last year. How to cope with a situation with fewer service providers, increasing numbers of customers, and increasing troublesome findings regarding the quality of service provided by audit firms?
Many economic sectors hit hard by the pandemic experienced only a temporary setback and have made a fast recovery. That means companies’ turnovers and balance sheet volumes have grown and for many that had to order a review before have now to spring for a more intensive service – a full audit. And many who were not previously subject to review now exceed the criteria for auditor review and must order a review. The audit calculator is a handy tool for finding out what your company’s requirements are – an audit, review or neither.
Important criteria for choosing an auditor are their qualification, trustworthiness, availability and experience. According to information from the Auditors Activities Register in Estonia as of June 2021, there were 344 sworn auditors and 131 audit firms. So, how to know which of them is reliable, operates in a proper manner, and meets deadlines? One way is to check the results of the annual quality control conducted by the Auditing Activities Oversight Board.
Number of audit firms with poor marks increases
As there are hundreds of auditors, they are not all audited every year but once every few years. A regular quality control in 2020/2021 was performed at 31 audit firms. Looking at the results in the Oversight Board’s yearbook, a cause for concern is the fact that the number of auditors not in complete compliance with requirements has increased – twice as many audit firms as a year before got a red (unsatisfactory) quality label. The results broke down as follows: 9 green, 14 yellow, 4 orange and 4 red*.
We should take a separate look at the reasons that firms received a red mark. It could be the fact that the auditor failed to gather appropriate evidence needed to prepare the auditor’s report or there was not enough certainty that the financial accounts are free of material misstatement. Or the firm used an improper financial reporting policy, as a result of which the annual accounts were, to a significant degree, inaccurate.
Most of the auditors who underwent quality control in the past season received a yellow label, meaning that less significant shortcomings were found. By way of explanation, it should be noted that auditors have a hard time fulfilling all requirements from the accruing new rules, resulting in a decrease in the number of audit firms that received the green status.
What happens if an audit firm is found to be red?
Audit firms who are evaluated as red for at least two years are discouraged from continuing to operate by the Oversight Board. If the audit firm does not take measures to improve audit service, the Oversight Board revokes their operating licence and, if necessary, strips the sworn auditor associated with the firm of their qualification if they have provided substandard level of audit service. An orange quality rating also requires the audit firm to immediately raise the level of service.
No company wants their annual reports to be audited by an auditor that has received a red or orange status. To avoid this, it is necessary to do some homework to make sure that the audit will not just follow legal requirements but is also genuinely beneficial: after all, an auditor is assessing whether accounting policies and processes are in line with regulations, and provides counsel on how to resolve any shortcomings.
*Green – audit service quality meets requirements; Yellow – minor shortcomings found in audit service quality; Orange – significant shortcomings, requires remediation; Red – audit service quality does not meet the requirements, significant remediation required.