Practice of Joint audit in Ukraine

Financial audit is the foundation on which trust and integrity are built into financial markets around the world. In this regard, Ukraine has implemented a well needed audit reform in 2016, inspired by an EU directive on auditing.

However, all around the world, the profession faces a decisive moment, and the public interest is at stake. Expectations are shifting; technology is changing the role of auditors and creating new opportunities; the case for audit reform in Europe – and elsewhere – is growing, spurred on by the need to create a healthier, more competitive market.

A survey commissioned by Mazars on the future of audit in 2021^[1] gives the position of more than 500 audit users.

Today, I would like to emphasize one element of particular interest, the joint audit.

Joint audit is included in the Ukrainian law "On the audit of financial statements and auditing activities", which came into force in 2018. So far, after several years, it has never been used and remains here misunderstood.  What is it exactly and what are the take-aways of already prior experience?

What is joint audit?

A joint audit is where two separate audit firms are appointed by a company to express a joint opinion on its financial statements.

It is fundamentally different from a ‘dual’ audit (or ‘shared’ audit) whereby one audit firm (or sometimes more) auditing parts of a group reports to another audit firm that ultimately signs off on the group audit.

Statutory joint auditors must belong to separate audit firms. Joint audits usually involve two audit firms but a small number of companies have decided voluntarily to appoint three audit firms to perform their joint audit.

The joint auditors are jointly liable for the audit opinion provided. When specific circumstances occur (change in the regulatory environment, acquisitions, exceptional transactions, etc.), consultations are generally performed by one single audit firm and conclusions are shared with the other auditor to establish a joint position. In the case of disagreements between the joint auditors, there are special procedures for the formulation of their audit opinion.

How is the overall audit work allocated between joint auditors? It is highly recommended to divide the audit work between the joint auditors on a balanced basis reflecting criteria which could be quantitative (the estimated number of work hours required for the audit) or qualitative (the qualification and experience of the audit teams).

Joint audit already applies in a number of situations:

• Joint audit is mandatory in France for all companies required to prepare and publish consolidated financial statements (with an exception for small groups), as well as for banking entities with total assets in excess of €450m. In France, within large groups, joint audit applies to, at least, the ultimate holding company (for the audit opinion in respect of both its individual entity and consolidated financial statements) and to all their French subsidiaries subject to a separate requirement to prepare a sub-consolidation. Within such groups, it is, however, possible for joint audit to be extended in practice to material subsidiaries in France and if felt appropriate abroad as well, even if they are not subject to any separate requirement for preparation of sub-consolidations.
• Joint audit is mandated in various countries for large banks or insurance companies, such as in South Africa for large banks.
• Joint audit can be (and is) performed as a voluntary arrangement for groups or even for individual companies, notably across Europe, including in the UK, and Ukraine! Joint audit is fully compliant with ISA 600 (Revised), “The Work of Related Auditors and Other Auditors in the Audit of Group Financial Statements”.

Myths and main questions about joint audit

The two most common criticisms of joint audit are in relation to their cost and the additional risks involved. We strongly believe that both criticisms are totally unfounded.

Is joint audit damaging the audit quality?

The risk of ‘things falling between the cracks’ is less likely to happen on a joint than a sole audit given the extra review work undertaken and the joint responsibility and liability.

In fact, and in our experience, joint audit increases audit quality:

• Joint audit is the application of the “two pair of eyes” principle to audits.
• It is when the two auditors compare notes and check each other’s work that real “auditor scepticism” occurs.
• Two auditors have more strength to challenge the management of an audited company on sensitive accounting treatments and, therefore, are more independent.
• In general, audited companies use the presence of the two auditors to take the best of each and to allocate the work in the best possible manner according to geographic coverage or technical expertise.
• IFRS are “principle-based” standards that require more judgment. Audited companies highly value having two experts’ opinions converging rather than only one on sensitive issues.
• Where joint audit is applicable, non-dominant audit firms have been able to invest in geographic coverage and expertise and become auditors of major global banks, insurers and high technology companies.

Is joint audit too costly?

When comparing large groups between France and UK (based on comparable datasets of companies in the FTSE 100 in the UK and the SBF 120 in France), we found out that the cost of audit per €bn of revenue is marginally less in France (with joint audit) compared to the UK (without joint audit).

We have also analysed the additional time costs incurred by the firms on joint audits. Most of the tasks brought about a joint audit situation are highly value adding as they are dedicated to the “professional scepticism” necessary to express an audit opinion.

Experience shows that this specific work ranges from 2.5 to 5% of the total audit cost for a large group. This additional cost must be compared with the additional security provided by the “four eyes” principle and by the reciprocal review.

In practice the additional cost is borne by the audit firms involved rather than being passed on to the audited entity. Joint audit also creates a more competitive environment that is conducive to a reasonable price/volume balance for the market.

What is the place of joint audit in the future of audit?

In France, the practice of joint audit is very well established, as it has been a legal requirement there for over 50 years and has gone through a number of phases of evolution to reach a level of maturity “signed off” by the market.

Beyond France, the survey on the future of audit mentioned in the introduction (covering 12 countries on five continents) raises also the question of joint audit. According to the respondents, the users of audits, it appears that joint audit is, evidently, increasingly understood by the market, with 89% answering they ‘know well what joint audits are’.

That understanding and the experience of it leads to favourable opinions of the method: more than nine in ten (91%) of the global respondents have direct experience with joint audit and a vast majority (88%) of those who have experienced it are in favour of the approach; more than half (54%) of them being ‘strongly favourable’ to it.

Expected benefits of joint audit according to the findings are: ‘increased stakeholder confidence’, ‘reduced risk of corruption or human error’ and ‘enabling companies to benefit from a broad range of technical expertise’.

Conclusion

To sum up, we see 4 fundamental reasons to consider joint audit:

1. Joint audit strengthens the technical knowledge. It enables entities to benefit from the technical expertise of more than one audit firm and to have a richer discussion on complex technical issues. It also offers additional scope for benchmarking best practices across the market
2. Joint audit reinforces audit quality via the “four eye” principle by creating timely and in-built independent quality control and stimulates innovation and awareness (“critical eye”) through rotating fieldwork after a set number of years.
3. Joint audit reinforces auditor independence and objectivity, it reduces the risk of over-familiarity, and it strengthens the auditor’s ability to stand their ground
4. Joint audit is also a way to develop a secure and dynamic market: it enables new entrants into the PIE audit market and encourages competition: it serves “coopetition” (cooperation + competition) between joint auditors resulting in improved quality of service for the market.

At Mazars, audit is, and always has been, at the heart of what we do. We know that financial transparency shapes fairer, more prosperous economies, and that auditors have a crucial role to play in achieving that integrity and clarity. That’s why we are committed to finding ways to strengthen and to help rethink our profession. We believe that joint audit is a strong procedure that will strengthen the quality of audit on the market for the largest categories of companies and groups.

Since the Ukrainian law on auditing allows companies to use joint audit, are you now ready to try it?

[1] The future of audit: Market view – Myths, realities and ways forward. Commissioned by Mazars and released in 2021, this survey was conducted by an independent research firm.