Business operators are hard-pressed to find an auditor to go over their annual report, since there are fewer and fewer auditors every year, but the amount of work just keeps on growing. The worsening quality of the work done by auditing companies is also a concern.
But why have auditors more work than they did? The high inflation of recent years swelled companies’ turnovers and balance sheet volumes, so now there are more companies who must have their annual reports audited or reviewed. There are now new categories of audit; such as a sustainability (ESG) audit. The audit calculator is a fast and easy way to check whether a company has to order an audit, review or neither.
We are also seeing that the number of auditors has dropped. According to the Auditors Activities Register, Estonia currently has 339 sworn auditors and 117 audit firms, which is respectively five and 14 fewer than three years ago. The number of practising auditors is falling because increasingly complicated requirements are being set for auditors’ work, and also because auditors who started activities in the 1990s are starting to retire from the workforce.
With businesses now looking for a needle in a haystack, they shouldn’t hire the first available professional but look at their background. Important criteria for choosing an auditor are their qualification, trustworthiness, availability and experience. How can you tell if the auditor you’ve landed on is reliable and does their work properly and on time? One possibility is to consult the Auditing Activities Oversight Board’s annual quality control results.
Given that there are hundreds of auditors, not each one is checked every year. Regular quality control will be carried out in 2023/2024 at 32 auditing companies. What is concerning is that the number of auditors who do not comply with the requirements is growing. The results for 34 auditing companies in the 2022/2023 period show that only 5 received a “green” score, while 6 were “yellow”, 15 “orange” and 8 “red”*. In the period that preceded it, there were more “green” companies and fewer orange and red companies: 9 greens (including Grant Thornton Baltic), 14 yellows, 4 oranges and 4 reds.
Considering that an auditor examines a company’s financial statements for compliance to certain rules and ensures that people reading the annual report get a fair view, in all material respects, of an organization’s financial position, it is a problem if some auditor did not manage or was not competent enough to adequately analyse financial statements. Substandard work by auditors can harm the perceived trustworthiness of the Estonian business environment.
Clients, auditors themselves and the legislators can all do something to improve the situation. I recommend that clients – the businesses – set rigorous standards for auditor’s work, and analyse whether a financial year ending in 31 December is the most suitable for their company. For ninety-five per cent of companies, the end of the calendar year is also the end of their financial year, so the workload for preparing and auditing annual reports falls into the same period. If the financial year ended on another date for more companies and organizations, that would allow accountants’ and auditors’ workload to be spread out and cooperation would improve.
I recommend auditing firms to implement internal quality control and invest in consistently training people. As for legislators, I would expect them to update the Auditors Activities Act. Based on the experience of sworn auditors, the companies currently required to undergo audits are too small, so the thresholds for compulsory audit and review of annual reports of companies and organizations should be raised. Also the internal level starting from which a company should undergo a full audit giving a higher level of assurance instead of a financial review with a lesser level of assurance is in need of adjustment. The Estonian Auditors’ Association has submitted corresponding proposals to the Ministry of Finance and the ministry has begun dealing with the matter.
*As a result of the quality control, the Auditing Activities Oversight Board workgroup gives an assessment on the quality of auditing activities – “green” means that the quality meets the requirements, “yellow” – less significant flaws present and improvement required; “orange” – significant flaws present and improvement required; “red” – quality of auditor service does not meet requirements, significant improvement required.
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