Master’s Thesis MSc A&C J. Huiting

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Master’s Thesis MSc A&C

J. Huiting

“Towards a higher audit quality”: the impact of the oversight,

the client and the auditors on audit quality.

Jens Huiting S2288974

j.huiting.2@student.rug.nl jenshuiting@gmail.com

MSc Accountancy

Faculty of Economics and Business University of Groningen First assessor: dr. S. Girdhar (Sakshi) Second assessor: dr. D. B. Veltrop (Dennis)

External supervisor: S. van Luit MSc

Date: 28-7-2017 Word count: 14.500

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Page 2 of 49 J. Huiting – Master Thesis MSc Accountancy

Abstract

This research poses the research question: "Why does the quality of audits done by Big 4 firms not increase as much as the AFM would hope?" The importance of asking this question is found in the fact that auditors are portrayed badly news in the news. This study looks at the extent to which the quality of the auditor's work is influenced by the AFM, the client and from influences within the profession. From the perspective of experienced auditors in a Big 4 office and a Next 9 office, this study looks at how the auditor is positioned in the Netherlands and what pressure it takes. Using a field research and desk research, the results indicate that auditors experience a 'tipping point' as described by Dowling, Knechel & Moroney (2015). They therefore believe that there must be a dialogue between the AFM and the audit firms about how they can work together to achieve a better audit quality. According to the interviewees, there is a great deal of interpretation space that allows auditors to think that they deliver high quality audits, but at the same time, the AFM thinks that is not the case and that the auditors need to do more. In addition, the client plays a role in the quality of the audit. A client can react both positively or negatively to the increase in the amount of work the of the auditor, thereby influencing audit quality.

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Preface

With appropriate pride lies in front of you my thesis for the completion of the Master of Accounting at the University of Groningen. The past six months have been a rather intense period. I am therefore very proud and grateful that this document lies before you. In particular, I would like to thank my supervisors who provided me with feedback during the process. In addition, I would like to express my gratitude to Marleen, Rianne, Thijs and Merel for the effort they have put into giving linguistic or substantive comments. In addition, I would like to thank my family for their support and compassion during the whole process.

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Abstract

... 2

Preface

... 3

1. Introduction

... 5

2. Theoretical Framework

... 8 2.1 The AFM ... 9

2.1.1 The development of the oversight body... 9

2.1.2 Focus on the audit file ... 12

2.1.3 Summary AFM influences on audit quality ... 13

2.2 The client ... 13

2.2.1 Accounting quality affects Audit quality ... 13

2.2.2 Client’s fee pressure on the auditors ... 14

2.2.3 Pressure of the client on the auditor to rely on the internal quality mechanisms ... 15

2.2.4 Summary client influences on audit quality... 16

2.3 Auditor ... 16

2.3.1 The legitimacy of auditors ... 16

2.3.2 Evolution of oversight-inspections and regulatory environment ... 17

2.3.3 Differences between auditor culture ... 19

2.3.4 Summary auditor influences on audit quality ... 20

2.4 Research model ... 20

3. Methodology

... 21

4. Results

... 24 4.1 AFM ... 24 4.2 The Client... 28 4.3 Auditor ... 31 4.4 Additional findings ... 36

5. Conclusion & Discussion

... 39

Reference List

... 43

Appendix A – Research Instrument (1/2) ... 48

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1. Introduction

The two crises and scandals around the world have a great impact on the audit industry (Holm & Zaman, 2012). Due to several accounting scandals like Enron and WorldCom, a new law came in place: The Sarbanes-Oxley act (SOX) (Gonthier-Besacier, Hottegindre, Fine-Falcy, 2016). The act had immediate impact not only on global corporations, but also on the audit industry (Bazerman, Loewenstein, & Moore, 2002). From that day the oversight body in the United States, the Public Company Accounting Oversight Board (PCAOB) was mandated to inspect all foreign and domestic auditors of U.S. SEC registrants (Lamoreaux, 2016) with US Generally Accepted Auditing Standards (US GAAS). In the Netherlands, a similar board is set up, namely the Authority Financial Markets (AFM) which inspects audit firms for compliance with International Standards of Auditing (ISA). The AFM is concerned with the task to foster honest and transparent financial markets in the Netherlands (AFM, 2014). This oversight on Big 4 firms in the Netherlands is therefore focused on increasing the audit quality1_{. Oversight}

boards like the AFM in The Netherlands and the PCAOB in the United States are trying to improve the reliability and accuracy of audits to protect investors and the society (PCAOB, 2012, p.1). Together, the oversight boards from different jurisdictions like The Netherlands and the U.S., form the International Forum of Independent Audit Regulators (IFIAR). The IFIAR wants to work on a new initiative to enhance audit quality around the world (IFIAR hopes, 2016). By intensifying quality monitoring, increasing the dialogues with networks of firms, and continue to look for root-causes of audit failures, the IFIAR and its members hope to enhance audit quality. This new initiative is the product of the results of the IFIAR research in 2015. The IFIAR showed that there is a lack of consistency in the quality of the audits and they underscore the concerns regarding the robustness of the internal control checks of the auditing firms (IFIAR, 2016).

The AFM in the Netherlands monitors for audit quality by performing inspections at audit firms. AFM conducted 2 inspections of the Big 4 accounting Firms, one in 2009-2010 and one in 2013-2014, in which the quality of the audits performed was measured. The conclusion of the AFM was that the quality of these audits over the years has not improved

1_{The focus of the inspections by the AFM on Big 4 firms is to evaluate the audit quality which these}

audit firms deliver. In the report: https://www.afm.nl/~/profmedia/files/rapporten/2014/onderzoek-controles-big4.ashx can be found on what areas of attention are important to the AFM.

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sufficiently2 (IFIAR hopes, 2016; AFM, 2014). The AFM mentions in its report on Big 4 firms that there structurally is insufficient accounting information available when performing an audit (AFM, 2014). The AFM stated in the same report that without compromising the efforts of Big 4 firms in recent years to enhance the audits they performed, they did not succeed in improving the quality sufficiently.

This study builds on the conclusion of the AFM that performance enhancement mechanisms within Big 4 firms do not yet result in the expected quality improvements. Power (2003) states that the auditing industry has been fighting for its legitimacy since its existence as a profession. Now in the 21st century the profession’s legitimacy may be under fire as never seen before (Power, 2003). Audit firms, regulatory bodies and professionals are trying to win public trust as auditing has been the subject of criticism for quite some time (Holm & Zaman, 2012).

The opinion of oversight bodies do not always align with the practitioners. Church & Shefchik (2012) for example highlight that the audit firms in the US frequently disagree with the PCAOB inspection results. This gap is acknowledged extensively in the literature (Church & Shefchik, 2012; Hermanson, et al., 2007; Hermanson et al., 2010; Holm & Zaman, 2012). It is expected that the audit firms in the Netherlands also not always agree with the results of AFM inspections. There is however another major stakeholder as it comes to the audit profession: the client.

The role that audit clients have in the process of auditing is widely studied. Clients try to influence and sometimes even pressure auditors to rely on the internal quality mechanisms present in a client’s business (Felix, 2001). In other words, clients try to persuade accountants to rely on the internal auditors. Felix, Gramling, and Maletta (2005) find that sometimes auditors are more affected in their audit evidence-gathering by client pressures than by internal audit quality. A more recent article from Ettredge, Fuerherm and Li (2014) states that during the 2008 crisis, client’s pressures through audit fees resulted in decline of audit quality. Although this result was only significant in the crisis, it gives a good example on how influential clients can be in the audit process.

2_{In 2010 48% of the audits subjected to the inspections were of sufficient quality. In 2014 this number}

has slightly increased to 55% (AFM, 2014). This only small increase of 7 % of quality is the result of the audit firms not being able to act as professional as the AFM wanted them to act

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Studying on the one hand there is the oversight that checks the audit files of auditors for compliance with the applicable standards and on the other hand there is the client that pays for the audit and can influence audit measures. The way these pressures on auditors affect the audit quality together is to my knowledge yet to be studied. By studying the different legitimacy claims professionals, regulators and clients have on audit quality (Holm & Zaman, 2012), we try to understand the movements in the audit profession.

This paper is focusing on Big 4 firms in the Netherlands and looks for reasons why these firms are not fully complying with the standards that are set by the regulators. An important focus is the ambiguity between the different parties: oversight, clients and practitioners as it comes to what to expect from a high quality audit. That is why this paper would focus on the question: “why does the quality of audits performed by Big 4 firms not increase as much as the AFM would hope? “

This paper can be considered as a supplementary research to the paper of Lamoreaux (2016) who found that PCAOB inspection access appears to improve audit quality. Lamoreaux does however question whether the inspection and enforcement is an optimal form of audit regulation (Pagano & Immordino, 2007). This study therefore complements Lamoreaux by looking at the influence of Dutch oversight on the audit profession. This study not only studies the effect of inspections, but also the relationship between the oversight, auditors and clients.

This study is relevant for educational institutes regarding their study program. The way the relationship between the AFM, the clients and the auditor’s works can be important for starting auditors, regarding how to settle themselves in this equilibrium. This study can also be relevant for the current profession as it gives insights on how the profession can increase the quality of their work. This paper is also relevant for oversight bodies and audit firms because this paper sheds light on key issues of why audit quality is not improving as much as the oversight bodies would hope. The issues mentioned can be subject of a discussion between the profession and the oversight in the process of increasing transparency. In this study a one-to-one semi-structured interview bases is used. While keeping to a certain line of questions there was room for the interviewee to highlight certain parts that he or she found important. The remainder of this report is as follows: section 2 will provide the theoretical framework which will be the basis for the rest of the report and the research, section 3 will elaborate a clear overview on the chosen methodology, section 4 will present the results of the research and section 5 will provide a conclusion and discussion of this study.

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2. Theoretical Framework

In order to justify the research area of the AFM, the client and the auditor, this study builds on the legitimacy theory. As described by Reus-Smit (2007), legitimacy is considered as the right or entitlement to act in a certain environment. While the accordance between the parties seems quite clear: the client gets audited by the auditor and the AFM monitors for quality, the relationship between the three parties is to our knowledge yet to be studied.

Firstly, the auditors. It is clear that they as a profession have a legitimate position towards audit quality. They are the practitioners and the effort they put in their audits and the processes behind it will influence the quality. Holm & Zaman (2012) also point out that for the profession to legitimise its existence, they have to convince the society that auditors can be trusted. This can be related to several missions and visions of Big 4 audit firms.3_{Secondly, although they}

are not the practitioners, is the oversight. They have an obligation towards the society to foster honest and transparent financial markets in the Netherlands (AFM, 2014). The legitimacy of oversight is also confirmed by auditors itself. Dowling, Knechel, & Moroney (2015) state in their study that audit firms instigate changes, even when there is some disagreement between the audit firms and the oversight. The fact that there is disagreement and audit firms implement the findings of the AFM, can be seen as that firms agree with the legitimacy of the oversight. Thirdly, the client. In addition to the practitioner and the oversight, they also have a legitimacy claim on audit quality. Power (2003) states that the legitimacy of both client and auditor are co-produced. Further the auditor-client relationship is widely studied (Chung, & Kallapur, 2003; Stanley, & DeZoort, 2007; Ettredge, Fuerherm, Li, 2014). This study therefore can be placed in a long tradition of other studies that engage in the relationship between the auditor and the client.

This study acknowledges that there are other parties, besides the AFM, the client, and the auditor that may or may not have a legitimacy claim towards audit quality. For example, the regulator, which sets the standards, could have a legitimate claim on audit quality. However, this study focuses on the inspection reports of the AFM in 2010 and mainly 2014 and the question why the quality has not increased as much as the AFM would hope. Considering the

3_{PwC’s purpose: Building Trust in Society and solving important problems, KPMG’s purpose: Inspire confidence}

and empower change in your business, Deloitte’s purpose: make an impact that matters, EY’s purpose: committed to building a better working world.

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activities of the auditor and the relationship it has with the client combined with the oversight that controls actively for the audit quality, this equilibrium forms the research area of this study.

The remainder of this chapter will consist of the analysis of the three parties. Within each section the problems and developments of each party will be discussed. The focus will be on how these problems and developments may have or possibly will affect the audit quality in the Dutch environment.

2.1 The AFM

2.1.1 The development of the oversight body.

After some severe accounting scandals like Enron & WorldCom and the initiation of the Sarbanes-Oxley act, the AFM was established in the Netherlands. It was only until after 2006 a new law was introduced in the Dutch audit environment: Law Oversight Accounting firms. (Wta). This new law gave the AFM the possibility to oversee the audit profession and restore justifiable confidence. The AFM, as oversight board in the Netherlands, controls for the audit quality performed by Big 4 firms. The effectiveness of the supervision by the AFM on Big 4 firms in the Netherlands has evolved extensively in the last couple of years. By working together with other members of the IFIAR from other countries and exchanging information with them, they can experience and learn from each other (AFM, 2014). To understand how this evolvement of the AFM influenced the profession it is important to ask:

Subquestion 1.1: Is there a difference in the AFM now and the AFM a couple of

years ago?

In the years to come, the AFM performed some inspections on the quality of audits performed by audit firms and concluded that quality reformations were needed (AFM, 2014). Big 4 firms that were inspected by the AFM in 2010 and 2014, reacted to these reports and came to the same conclusion: quality reformations were needed (AFM, 2010; AFM, 2014). In order to understand how the profession interprets the results of these inspections this study questions:

Subquestion 1.2: How would you explain the quality difference in the AFM

inspections of 2010 and 2014? Wouldn’t you have expected the audit firms to have done better in the eyes of the AFM? Why (not)?

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Oversight bodies like the AFM and the PCAOB have both their own incentives to establish and thrive the legitimacy of their activities as oversight body (Dowling, Knechel & Moroney, 2015). The focus of oversight remains to increase audit quality and play an active role in preventing audit failures (Dowling, Knechel & Moroney, 2015). The PCAOB created from this standpoint an environment where the auditors had an incentive to better their work in response to the issues that arose from the inspections they held. Church & Shefchik (2012) confirm this statement, but in the more recent years an increase in the amount of deficiencies and an increase in the length of the reports about the inspections for Big 4 firms is seen (Ege, Knechel, & Lamoreaux, 2015). The inspection reports of the AFM for Big 4 firms did also increase in size, from 25 pages in 2010 to 123 pages in 2014.

The doubt regarding the effectiveness and skilfulness of the oversight has been an issue for quite some time now. Glover, Prawitt, & Taylor (2009) recognize that the oversight body in America, the PCAOB, has skilful staff and people who do their best to serve society. Inspectors mostly come from the public sector and have skills and experience in the accounting and auditing area. A problem with this is however that these skills quickly become outdated. Furthermore, Glover, Prawitt, & Taylor (2009) agree with the statement of the PCAOB that the PCAOB experiences and will continue to experience difficulties in hiring new personnel and especially industry experts and experienced auditors. This trend is also seen in the Netherlands as Femke de Vries, board member of the AFM, states in an interview: “we can’t afford experienced auditors, they are priceless” (AFM: Goede accountants…, 2016). This is a concern for the functioning of the oversight and for the audit quality, knowing that oversight inspections tend to increase audit quality (Francis & Yu, 2009). Whether or not this concern is just in the profession nowadays, this study considers the following question:

Subquestion 1.3: How does the capability of AFM inspectors influence their

position?

The increase in quality is mainly recognized by the fact that audit firms built in changes as a reaction to inspection results (Carcello et al., 2011). A recent study from Defond & Lennox (2017) concludes that inspections in the US are an incentive for audit firms to improve their audit services, especially in the post-inspection period. To shed light on the influence AFM inspections have in the Netherlands on the Dutch profession, this study considers the following question:

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As long as deficiencies occur and inspections are needed, the role of an oversight body in the auditing industry is necessary. An interesting question in the evolution of oversight and regulation however is: “where does it end”. Dowling, Knechel & Moroney (2015) underscore this by stating: “the audit regulator must be careful that it does not exceed the so-called ‘tipping-point’”, hereby asking the audit regulators to continue to think about what is best for the profession and maybe also listen to the profession itself in order to continue the enhancement of audit quality. To understand how the oversight of AFM influenced the audit profession in the Netherlands, this study questions:

Subquestion 1.5: Has the AFM oversight resulted in changes in audit practices

that are not necessarily benefitting audit quality?

It is expected that the auditors in the Netherlands experience pressure from the oversight, considering this increasing amount of deficiencies and size of reports. Expected is, considering the increasing amount of deficiencies and size of reports, that the auditors in the Netherlands experience pressure from the oversight. This pressure comes mainly from the fact that auditors need to perform more work in order to increase the quality, but in the eyes of the AFM, no matter wat the auditors do the quality does not increase.

Partly due to the financial crisis, the call for more transparency and more effort from the auditor was heard. Not only from the stakeholders and politicians, but also from the audit profession itself. The users of an audit report are not only interested in the auditor's conclusion but also in information on the main issues during the audit and the manner in which the accountant has performed his work (Nieuwe controleverklaring, 2014).

In 2010, the AFM began with its first inspection of the Big 4 firms. In the inspection report AFM mentions that because of the financial crisis, interest in the financial statements was increasing (AFM, 2010). The AFM acknowledges the possibility of pressures on corporations to flourish their financial statements, and uses this to point out that professional scepticism of the auditor is very much needed. By performing inspections, the hope is to enhance audit quality and create insight whether the auditor is performing enough to ensure the quality of the audit (AFM, 2010).

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2.1.2 Focus on the audit file

One distinct aspect that has been under much discussion in the Netherlands is the audit measurements and the transparency of the audit report (AFM, 2010; AFM, 2014). In the late 19th century the audit report was sufficient if it stated “audited and certified”, or simply “audited” (Monkhouse 1890). Monkhouse however preferred a more extensive audit report where the auditor spelled out the nature and amount of the audit work and audit evidence that was gathered.

The idea of spelling out what the auditor has done to provide a sufficient and high quality audit is very much alive in recent auditing. In 2014 for example, the new statement of assurance was launched (Nieuwe controleverklaring, 2014). This new statement requires a much more transparent audit report from the accountants. Auditors have to present their thoughts and performed measures much more extensively. This way the oversight board, AFM in the Netherlands, can identify whether an audit is performed in compliance with the standards or whether it is non-compliant.

There is however a downside to the increasing focus on the documentation part of the audit. While the auditors are focusing on the small details regarding the documentation, the risk increases that they will lose sight of the audit itself (Dowling, Knechel, & Moroney, 2015). Dowling, Knechel & Moroney (2015) report in their study that auditors feel that there is a trend going towards ‘form over substance’. The focus of oversight to focus more on documentation can impair the overall audit quality. Auditors are forced to spent more time on documenting and therefore find it hard to put the same amount of time in the audit measurements, because there is an audit fee to consider. Because of the recent publishing of this paper of KDM it is expected to see in our results the same thoughts. In order to study the trends in the Netherlands regarding documenting the audit, this study questions:

Subquestion 1.6: What should be the focus of the documentation of an audit?

Subquestion 1.7: What kind of influence has the focus on more documentation on

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2.1.3 Summary AFM influences on audit quality

In summary, the AFM plays an important role in the audit quality that auditors in the Netherlands deliver. By performing inspections, the AFM plays an active role in preventing audit failures (Dowling, Knechel, & Moroney, 2015). There are however sources that question the effectiveness of the oversight body, because of inexperienced inspectors and because a seemingly endless increase of demands from the oversight. An example is the increasing focus on the documentation and the transparency, which may be hindering to the audit practice.

2.2 The client

2.2.1 Accounting quality affects Audit quality

The industrial revolution of the 18th century marks the beginning of capital markets and thereby the separation of ownership and managers (Imhoff, 2003). The result was a free market where independent auditors checked the performance of managers for almost a hundred years. The market crash in 1929 marked however that the equilibrium was out of balance and had to change. Some parties pointed out that the lack of reporting standards were the reason that the market crashed4 and a solution had to be thought of.

In order to rebuild trust in the market and the financial reporting for creditors and investors, focus began to increase towards the financial reporting principles: US GAAP (Imhoff, 2003). The reason why attention is given to the financial reporting of a client is because this study builds on literature that uses financial reporting and the process that lies behind the financial reporting as a proxy for audit quality (Kinney, Palmrose, & Scholz, 2004; Stanley & DeZoort, 2007). Furthermore, the AFM acknowledges that an audit increases the fair and transparent functioning of markets through ensuring the reliability of the financial reporting (AFM, 2014). The AFM does however not take into account the effect the processes behind financial reporting have on the work of the auditors and therefore the audit quality. We therefore also expect to see in our results that auditors find it of great value that the client has a good and efficient financial reporting system implemented, because this helps increasing the audit quality. Supplementary to this finding is expected that when clients don’t have an adequate financial reporting system, this will complicate the audit. This in turn decreases the quality of

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the audit, which might explain the audit quality as measured by the oversight body is too low (AFM, 2014). To study the feelings of the auditors towards the relationship between accounting quality and audit quality, this study questions:

Subquestion 2.1: How does the accounting quality affect the audit quality?

2.2.2 Client’s fee pressure on the auditors

Research shows that during the crisis of 2008, auditors were able to make fee concessions to several clients (Ettredge, Fuerherm, Li, 2014). The pressure that clients had put on auditors was not unnoticed by regulators. These regulators frequently stated that this decrease in fee could reduce the effort that auditors put in the audit and therefore it could reduce audit quality (Leone, Rice, Weber, & Willenborg, 2013; PCAOB, 2010). A study from Bierstaker & Wright (2001) found that due to audit competition the billable hours for an audit went down in order to cope with fee pressure. Although this study is of significant age, the relevance is still of worth because auditor competition is still present. In order to look at the effect of fee pressure in the current audit profession, this study questions:

Subquestion 2.2: Does fee pressure still affect the current audit profession?

It is however one story that the audit fee goes down from a competition perspective, but another that audit fee declines from a client pressure perspective. Client pressure is defined by DeZoort and Lord (1997) as “the pressure to yield to a client’s wishes or influence whether appropriate or not”. It is not clear whether these results hold for actual auditor behavior. As independent providers of assurance are supposed to resist such pressures. This has not always been the case, as Gramling (1999) found that fee pressure from clients resulted in a decision from the auditor to rely on a greater extent on the client’s internal audit function. It also was due to fee pressure that the auditor decreased its budgeted hours, despite the risk a client has (Houston, 1999). It is however still important to look into the possible effect that client pressure has on the audit profession these days. When clients still pressure auditors in the way DeZoort & Lord and Gramling described, this has its influence on audit quality. That is why this study question:

Subquestion 2.3: What role does a client fulfil in enhancing audit quality?

When the audit process is looked into and the dominance of Big 4 audit firms is considered, a different equilibrium can be thought of between clients and audit firms. The process of client acceptance during the audit is as follows: the client first picks the audit firm and then the audit

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firm will accept or decline the client as a client (Eshleman & Guo, 2014). Considering this process, this study expects that the pressure that clients have on auditors is not as much as it was in the past (DeZoort & Lord, 1997; Gramling, 1999). While the process of going into a business relationship begins, auditors and clients first bargain a price for the audit. Literature shows that the party that is more powerful expects greater concessions (Pruitt & Carnevale, 1993; Barnes, 2004). Following studies that support the claim of Big 4 auditors delivering higher audit quality (DeAngelo, 1981; Eshleman & Guo, 2014) it is even possible that due to dominance of Big 4 auditors and the superior audit quality (Eshleman & Guo, 2014), that they have the power over the client during an audit. Meaning that Big 4 audit firms determine what the price of the audit will be and that there is little room for discussion. It is therefore important to look into this relationship in the Dutch audit environment because of its significance in the audit process and its influence on audit quality.

2.2.3 Pressure of the client on the auditor to rely on the internal quality

mechanisms

There is another aspect of how a client can pressure auditors in performing their audits. This one is however focused on the moment when auditor and client are already in a cooperation. The main idea of audits performed in the Netherlands is that they are principles based. This means that auditors use their professional judgment to perform a high quality audit. But it also means that auditors are used to support on the internal quality checks present within the client e.g. the internal audit function. Felix (2001) found that clients sometimes put pressure on the auditors to support on the internal quality mechanisms available in the organization. To study whether these pressures are still present in the current days of the audit profession, this study questions:

Subquestion 2.4: Do clients somewhat pressure auditors to rely on the internal

quality mechanisms?

Auditors are obliged to rely on the internal audit function of a client when appropriate (Anderson, Christ, Johnstone, & Rittenberg, 2012; Whitehouse 2013). In order to be as effective as possible, audit firms therefore also try to use an internal audit function (PCAOB, 2009). In order to rely on these functions an auditor must first assess the quality of these functions (Zain, Zaman, & Mohamed, 2015). The reason behind these checks is that the AFM wants to see whether the auditors have done enough to say without doubt that they can support

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on the internal quality functions within a client. These quality checks are however somewhat annoying for clients, because more quality checks by the auditors could mean that the audit will be more expensive. In some cases, the AFM wants to see that auditors perform more measurements themselves in order to assess the quality (AFM, 2014). This would be really bothersome for the client because this would take even more time of the auditors, and more time means more costs. This supports the statement of Felix in 2001 that clients try to put pressure on the auditors to use the internal quality functions available internally.

It is expected, that the pressure of clients on the auditors in the past to rely on the internal audit functions has declined, mainly because of the increasing power of Big 4 firms. It is however imaginable that, due to the competition, an audit firm still tries to be as cost-efficient as possible.

2.2.4 Summary client influences on audit quality

In summary, the client has also an important role in the audit quality that auditors in the Netherlands deliver. At first, several studies find a relationship between accounting quality and audit quality (Kinmey, Palmrose, & Scholz, 2004; Stanley & DeZoort, 2007). When the accounting quality is low, it is considered that the audit quality will be lower as well. Clients could in the past also pressure the auditor with the audit fee, for example by yielding to a client’s wish (DeZoort & Lord, 2007). In the current day-equilibrium it is expected that clients do not have that much power to influence Big 4 auditors. Auditors are however dependent on the client, and that may be a weak spot for the auditors. They rely namely on the internal audit function of the client, and sometimes this is of insufficient quality.

2.3 Auditor

2.3.1 The legitimacy of auditors

Since the beginning of its existence as a profession, auditors have tried to defend and establish their work (Lee, 1995). The way society benefits from the audit profession is therefore very important for auditors. For one thing, auditors have to detect fraud in order to prevent major consequences for the general public and the audit firm for which the auditor works (Beasley, Carcello, Hermanson, and Neal, 2009). Audit firms are aware of these responsibilities and make that public through their company’s strategies. With statements like “Building trust in

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society” (PwC) and “Inspire Confidence” (KPMG), audit firms try to point out that they are helping society through their work: performing high quality audits.

In order to understand how the profession itself ensures that the audits are of the highest possible quality, one has to know what audit quality is. In this study the definition of DeAngelo (1981) is used: “the quality of audit services is defined to be the market-assessed joint probability that a given auditor will both (a) discover a breach in the client’s accounting systems, and (b) report the breach”. Another study gives a broader definition regarding audit quality. In the study of Christensen et al. (2015), practitioners were asked to provide four definitions of audit quality and how each of them ought to be measured. Practitioners find that financial statements have to be transparent, but above all accurate and reliable. Other important definitions of audit quality are that the auditors have to be independent, sceptical, well-trained and competent. But the most important was that the audit had to be in compliance with the US GAAS.

Auditors receive so much attention that they are facing an awkward and interesting problem. The two most common accusations towards auditors are that fees are too high, what can mean that the Big 4 firms have too much pricing power, and that audits are of insufficient quality (Knechel, 2016). The reason why this is a problem is because efforts from the profession to increase the quality of the audit will lead to higher prices (Knechel, 2016). While on the other hand, a reduction on audit fees will lead to a loss of audit quality. This situation is confirmed by the AFM inspections in 2010 and 2014, that conclude that the audit quality is of an insufficient quality (AFM, 2010; AFM, 2014). The reaction of the oversight, also noted by Knechel (2016) is for auditors to perform more measurements and more documentation. It is however questioned whether this approach will result in the most increase of quality.

2.3.2 Evolution of oversight-inspections and regulatory environment

The results of inspections of Big 4 audit firms differ between the ones AFM conducted and the PCAOB inspections (Lindberg & Seifert, 2010). The reason for this can be explained by the different legislation that is used in the Netherlands (ISA) and US (US GAAS). ISA requires more individual professional judgment of the auditors and when audits are subjective to US GAAS, a more professional “checking-the-box” -principle is required (Lindberg & Seifert, 2011).

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Audits which are based on rules-based audit standards (US GAAS) tend be more structured than the principle based audits (ISA) which require more professional judgment. A trend in the Dutch regulation is that it is beginning to look a lot like a rules-based system, where the AFM is focussing on ISA compliant audits (AFM, 2014). The way oversight interprets the rules is important to consider while studying the audit quality in the Netherlands, that is why this study questions:

Subquestion 3.1: Would you in general describe the AFM as being more

rules-based or more principles-rules-based, and why?

Power (2003) states that the tautness between judgment and structure is multifaceted. The supremacy of relatively more structured audits follows the increasing demand for transparent and legitimate standardized audit practices. This demand is also described by Cushing and Loebbekke (1986), who idealise the auditing process as a logical series of steps. Power (2003) does however state that a more structured audit is about control and legitimacy, which will not automatically lead to a better and efficient audit and maybe diverts the focus to irrelevant items of the audit. Dowling, Knechel & Moroney (2015) point out that auditors sometimes find themselves doing a lot of work that the regulator finds important, but in their view adds little value to the audit (Church & Shefchik, 2012). Expected is that in the Netherlands the same kind of trend is noticeable. This study explores this by questioning:

Subquestion 3.2: Do you feel audit firms are changing their procedures and

practices based on AFM inspections, even if they feel those changes are not benefitting audit quality?

By increasing the amount of rules and the amount of inspections to enforce those rules, oversight bodies believe that audit quality will improve (van Buuren & Wong, 2016). Dowling, Knechel, & Moroney (2015) agree with this, but do however point out that there is a so-called “tipping point”. In other words, Dowling, Knechel, & Moroney believe that enforced compliance will at some point show some adverse effects on quality. This discussion whether or not the regulation and oversight succeed in enhancing audit quality was and is very much alive. Even before the two reports of the AFM in 2010 and 2014 came out, researchers were discussing if the oversight bodies were enhancing or hindering practice innovation and thereby audit quality. (Moore, Tetlock, Tanlu, & Bazerman, 2006; Robson, Humphrey, Khalifa, & Jones, 2007). To contribute to this discussion, this study asks Dutch auditors:

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Subquestion 3.3: What do you perceive audit quality means to the AFM?

Subquestion 3.4: What would make an audit a high quality audit?

Subquestion 3.5: Research found that the amount of detailed information that is a

threat to audit quality. How do you feel about this?

2.3.3 Differences between auditor culture

The attitude of auditors is most likely very influential in the process of increasing audit quality. Auditor characteristics for example, influence audit quality, but in the case of a Big 4 audit firm, these characteristics are constrained by internal quality mechanisms within the firm (Gul, Wu, & Yang, 2013). Where the characteristics and preferences for auditing may be limited in such an environment, auditors still have their visions on how the audit profession should be executed and how the oversight should be arranged. It is for example shown that the culture, present in a country, influences the way auditors apply auditing standards the way he or she sees appropriate (Endrawes & Monroe, 2012). To study on how professional auditors in the Netherlands would organize the audit environment, this study questions:

Subquestion 3.6: Given a “blank canvas” how would you, design the audit

profession and its environment?

Kleinman, Lin, & Palmon (2014) say that nations act differently around their auditing standards, and sometimes the audit standards are interpreted differently to suit personal needs (Restoy, 2011). This finding justifies that there can be a different view towards standards between the oversight body AFM and the Dutch auditors. This justifies the argument that the AFM can interpret the audit standards differently than the auditors and that there can be different views of when an audit is of a high quality.

At the moment it looks like that the oversight, the AFM, has the strongest legitimate claim regarding what a high quality audit should look like. Fines are namely imposed to all the Big 4 audit firms because the quality was perceived too low. So even when auditors do not agree with the conclusions of the AFM, they are probably forced to comply with the interpretation of the audit standards the AFM inflicts. There is however something happening in the Dutch audit environment. One Big 4 audit firm charged the AFM because they disagree with the way in which the AFM assesses the quality of the auditing. This sets an example that auditors are starting to defy the AFM. The decision of the judge whether or not the AFM’s handling is just can form the bases of a whole new equilibrium in the Dutch environment. To study how the

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relationship between oversight and the profession influences audit quality, it is important to know how the relationship actually is shaped:

Subquestion 3.7: How would you describe the interaction with the AFM? Is there

room for discussion, differences of opinion?

2.3.4 Summary auditor influences on audit quality

Auditors face critique in twofold: the audit fees are too high and the audits are of insufficient quality (Knechel, 2016). Due to this critique the AFM started with inspections on the audits. As a result of the inspections, auditors feel that they have to do more work, and some of the work is not adding value to the audit (Dowling, Knechel & Moroney, 2015). Studies show that there is a tipping-point where the increase of work tend to impair audit quality instead of increasing it. An interesting point of view is sketched by Restoy (2011). He states that audit standards can be interpreted differently. This could be the reason why audit quality is not as high as the AFM would hope because auditors and oversight interpret the audit standards differently.

2.4 Research model

Based on the theory and literature described above, a research model is developed as can be seen in figure 1. The model describes the relationships and pressures within and between the parties. It is expected that internal problems or developments within each party influences other parties and ultimately has its influence on audit quality. By studying these influences, a better understanding in the audit quality as it is today can be realised.

AFM Client Auditor - Development - Audit file - Accounting quality - Fee pressure - Internal audit function

- Legitimacy - Evolution - Culture Audit quality Research Area Regulator

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3. Methodology

This study is explorative and qualitative in nature. The advantage of qualitative research is that through this method, relationships can be found in a specific context (Lacey, 2001). A disadvantage of this kind of research is however that questions and analyses are liable to subjectivity. By building the study around a theoretical framework the subjectivity is tried to be kept at a minimum. And important to point out is that qualitative research focusses not on numbers or statistical evidence, it focuses on the meaning (Smith, 2014)

The research question of this study is addressed through a case study in a Big 4 firm and a ‘Next 9’ firm. A case study is most suitable, because this approach is very useful when many variables are involved and where actual practices are put under the scope. Yin (1989) adds that case studies are very efficient when the research question starts with “why” or “how”. Considering our research question, a case study is most appropriate.

Because this study is aimed at understanding the different views of the AFM and clients towards audit quality, data will be gathered through field research and desk research. The field research consists of semi-structured interviews that will be executed with experienced auditors who are currently working at a Big 4 firms or the Next 9 in the Netherlands (Beattie, Fearnley, & Hines, 2013). These auditors have a minimum experience of 16 years and all are or have been managers within the audit firm. Participants were first contacted by the researcher and were asked to participate voluntarily to this study. Before starting with the actual interviews, a final check with the thesis supervisor will be conducted with a concept questionnaire. By doing so, the semi-structured basis of the interview was tested if the questions fit the research question of this study. The interviews were conducted by two researchers, the reason for this was the lack of experience in interviewing people and making sure important questions were not missed. Afterwards the questionnaire is passed on to employees of the firms to check whether confidential evidence is being asked. One question was deleted from the questionnaire for confidentiality reasons. After these two checks, the actual interviews will be conducted. These interviews are all recorded on tape and transcribed, this is done with consultation of the participants. In order to prevent misinterpretations, the relevant information from the interviews is sent back to the interviewees. This method is also used by Lillis (2006) and ensures internal validity and, to some extent, prevents biased conclusions. The quotations found in this study are citations from the interviews that are translated from Dutch to English.

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Extensive information was gathered through a desk research. Reports from the PCAOB and the AFM, news reports and studies. The transcripts of the interviews together with the other information analysed in search of patterns or themes that are also sketched through the literature review and the theoretical perspectives This method of analysing is in line with audit quality research methods mentioned by Beattie, Fearnley, & Hines (2013).

The number of participants for the interviews is not clear from the start. The environment from which we attract the sample, can be seen as fairly homogeneous – practitioners and regulators in the audit profession - and therefore interviews will be held until saturation is achieved. Studies show that between 6 and 12 interviews, in a relative homogenous population, should be enough to reach a state of saturation (Guest, Bunce, & Johnson, 2006; Saunders & Townsend, 2016). Francis et al., (2010) and Marshal (1996) have an interview range between 13 and 15. When a state of saturation is achieved, no more new information is gathered. In this study the state of saturation was achieved at a number of interviewees of 7.

Figure 1 shows the general information about the participants of this study (N=7). Table 1 shows an overview of general information regarding the work experience of the participants. Appendix A shows the research instrument that was used during this study.

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Figure 2 – Overview distribution function participants

General information participants

N Min Max σ Average total experience in years* 23 16 38 8,2 Average experience current function in years** 10 2 20 6,6

Table 1 – Overview general information participants

* One of the participants did not mention the years he has been working with the firm. ** Two of the participants did not mention the years of experience in the current function.

Partner 43% Director 43% Senior director 14%

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4. Results

This chapter sketches in detail the findings based on the analyses of the interviews that were conducted. The way this section is structured is similar to the theoretical framework, namely discussing the three parties: AFM, Auditor & Client. At the end of this section some additional findings are presented.

4.1 AFM

4.1.1 The development of quality demands of the oversight.

The AFM is since 2010 focusing on the oversight of Big 4 auditing firms through inspections. Key areas are the focus of increasing audit quality performed by audit firms and to play an active role in preventing audit failures (Dowling, Knechel & Moroney, 2015). Considering these two incentives, it is expected that the AFM is trying to establish legitimacy over their activities as oversight board. The way the AFM is doing this is however questioned:

[I think that the AFM struggles to find a place in the oversight-spectrum. I have the feeling that the AFM feels the urge to keep showing her teeth - Director] [I think that the AFM has increased in her reviews - Director]

When the AFM started with reviewing Big 4 audit firms, their capabilities were questioned the participants. One interviewee had doubts whether these reviewers had the knowledge and experience to assess an audit on quality and compliance. Even in the latest review by the AFM on Big 4 firms, there were some inexperienced reviewers, which did not make things easier. Indicated by interviewees:

[What the AFM understands under audit quality has evolved. In the beginning they were a bunch of lawyers who looked very closely at a legal compliance level while reviewing an audit file. They were people with no practical experience who did not understand what an audit included, those were annoying reviews. – Senior Director] [The inspection was executed by three men. Very young, considerable inexperienced, and very formal, which in itself is not bad as they are the reviewers. Only it led them to be quite rigid in their minds. As a result, (…) they had to be explained in detail because they did not understand – Director]

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At a certain moment in time the reviewers have grown in experience and more people from the profession found a job at the AFM.5 Subquestion 1.1 can therefore be answered with a note that the profession feels there has been a change in the AFM. More practical experience within the AFM would help to better understand each other. For example, when the reviewers understand the way of thinking of the auditor, a much more balanced way of oversight and practitioner would be possible.

[Just looking at an audit from a legal perspective is a recipe for a disaster. It is good that there are people with practical experience of course. (…) When the oversight spends just as much time reviewing a file as we take performing the audit, then the balance is gone. – Partner]

The result of reviewers that possibly experienced difficulties in understanding the depth behind an audit is that more transparency in the audits is demanded (Humphry, Loft, & Woods, 2009). This answers subquestion 1.3, regarding that the capability of AFM inspectors, influence the amount of disclosed information. When in 2014 the new audit statement was introduced in the Netherlands a more extensive description of the audit work was demanded. The conclusion of the auditor was not sufficient enough anymore and extensive information regarding the activities had to be disclosed. In order to assess the compliance and quality of an audit it is somewhat logical that enough information should be available in the audit file. There is however a feeling that the trend of disclosing more and more information will lead to an opposite effect, namely a declining audit quality.

[In addition, capturing and file editing is also important. It should be a tool, but on the other hand, it is also something that is enforced by regulation and supervision. Now we need to put a lot more effort in the documentation part than we were used to and it does not necessarily result in a higher audit quality – Senior Director]

This finding is in line with the “tipping-point” as described by Dowling, Knechel & Moroney (2015) It seems like it that the auditor finds the work that has to be done for the oversight is excessive of nature. The disclosure of more information and the disclosure of judgment calls of the auditor during an audit is very demanding. Regarding subquestion 1.5 it seems that

5_{People who perform the inspections at the AFM have to comply with several quality items. They have to be a}

chartered accountant (RA) and they have to own some personality characteristics which will help during the inspections.

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auditors do not necessarily have to change the audit practices with activities that are not benefitting audit quality. It is better to say that auditors have to do more overall to perform a higher quality audit. The oversight needs to see for example, more detailed information in order to assess the quality of the audit (AFM, 2014). The audit profession is a highly-skilled environment where professionals base their decisions on both measurements and professional judgment. The last aspect is known to be very hard to disclose and can result in a discussion between the profession and the oversight.

[Sometimes, a piece of judgment is needed and the art is that you disclose this piece of judgment (…) If you do not disclose your considerations, and you have done nothing, then you soon will have a discussion with the AFM that your file is not compliant. I think that is the biggest challenge we are facing today – Senior Director]

This aspect is confirmed by a recent article from Defond & Lennox (2017), who find that deficiencies in the inspection reports are often considered by auditors a problem of documentation. The PCAOB does however denies this complaint (PCAOB, 2012a6). We can confirm that the opinion of Dutch auditors is similar to the ones in the US. What is certain is the fact that the inspections of the AFM started some kind of discussion how the audit should be performed and how the documentation should be done, this relates to subquestion 1.4 in a way that both the profession and the oversight are thinking about what it takes to increase audit quality.

4.1.2 Focus on the audit file

The AFM wants to see every move and every thought of the auditors disclosed in the audit file. While increasing the transparency by providing more information, debatable is the relevance of this amount of information. Dowling, Knechel, & Moroney (2015) point out that the regulator finds it important to see all this information, but the auditors find themselves doing a lot of work that, in their view, adds little value to the audit. The AFM’s wishes to see all the information that was ever used during the audit therefore can be seen as excessive.

[The most important thing is that you use your professional judgment with what information is required, because it has to contribute to the audit. Disclosing the most

6_{The PCAOB disagrees with the fact that an absence of well documented findings from the auditors results in}

deficiencies found during the inspections. There also has to be an absence of other evidence that the audit is performed in compliance with ISA.

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relevant data and what you did with it is therefore more interesting for the audit. (…) However, the wish of the AFM is to see all the information, but that does not add anything – Senior Director]

This quote answers subquestion 1.6 in the way that auditors find there is a difference in focus regarding what should be disclosed in the audit file. The auditors want only the most relevant data, but the AFM wants as much data as possible to see the big picture. A possible reason why the AFM wants so much information is that they want to see how the auditor makes their decisions. Therefore, the feeling in the profession is that they are very strict in how everything must be documented in the audit file. The profession thinks the strictness of the AFM is of value, however sometimes the oversight can be too profound and this causes friction between the profession and the oversight:

[The AFM is also very strict in how we must write things down (…) the meaning of ‘document this’ is arbitrary and open to interpretation. (…) The AFM has forced us to document more and more of our choices. However, this is not literally mentioned in the ISA’s. The measure the AFM maintains remains an interpretation of what ‘document this’ means. – Director]

The fact that the auditing standards and especially the ones focusing on documentation, are open to interpretation seems like a key aspect why the quality of audits is as low as it is today. The ISA’s, where the Big 4 firms in the Netherlands have to comply with, are principles-based and professional judgment is therefore very important. How to document their judgement is very difficult for auditors, but also essential for the oversight to understand and measure whether the auditors have done enough to do an adequate job. Sometimes the audit can be performed in compliance with the standards, but the documentation is insufficient. This difference is nicely worded:

[Documenting the choices you make and how to interpret certain things, that is the difference between an audit that could be compliant and an audit that is of high quality, demonstrable, and verifiable – Director]

[We are so focused on the audit file, making it compliant with ISA, that we lose sight of the content. This is a threat to the quality of the audit at the moment – Director]

This statement by an experienced auditor within a Big 4 firm may reflect that there is too much focus from the AFM on the audit file instead of the work performed by the auditor. The

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inspections of the AFM are installed to enhance audit quality and creating insight whether the auditor performs a high quality audit (AFM, 2010). Creating insight can however lead to a ‘defensive auditing’ style of the auditors and this may impair the quality of the audits.

4.2 The Client

4.2.1 Client’s impact on the audit quality

Central in this section is subquestion 2.1: How does the accounting quality affect the audit

quality? The accounting part and the processes behind it, are very important for auditors.

Especially in the Dutch environment, where auditors are relying as much as they can on internal mechanisms. This is also recognized in studies from Kinney, Palmrose, & Scholz (2004) and Stanley & DeZoort (2007), where financial reporting and the processes behind financial reporting are a proxy for audit quality. The importance of the financial reporting is pointed out by the fact that clients get help from the auditors to structure their financial reporting process:

[When you arrive at a client for the first time, you try to ‘raise’ him. The client has to learn how to do certain things regarding the financial reporting - Director]

For an auditor to perform a high quality audit, he must really understand the client and its business. This is in some cases however easier said than done. When the accounting of a client is insufficient to rely on, auditors have to perform their own substance measures. This can however be sometimes associated with resistance of the client. And sometimes the auditors even have to do more measurements because the AFM wants them to do it, and that also causes struggles between the client and the auditor:

[Clients are starting to ask questions like: “Yeah, accountant, you are mostly acting out of anxiety for the audit file. At a certain moment you have to ask yourself what is relevant for me as a client.” – Partner]

When the client doesn’t see the value of more work of the auditors, but only sees the price rising, than there is a mismatch between the client and the auditor. Auditors may find themselves in a tight situation when more work has to be done and the fee stays the same. This phenomenon is confirmed by the PCAOB in 2010, where they state that: “(...), auditors might be pressured to significantly reduce their audit fees. Confronted with reduced revenues, some auditors might make inappropriate reductions in the extent of audit procedures in order to

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achieve cost savings” (PCAOB, 2010). Felix (2001) showed this in the past that fee pressure has its influence on audit quality and Ettredge, Fuerherm, & Li (2014) found recent evidence that fee pressure is negatively associated with audit quality.

The literature is quite clear about the influence of fee pressure and accounting quality on audit quality. It looks like it that auditors find revenue in some cases more important than the quality of the audits they performed. Results from the interviews are mixed regarding this subject. One interviewee points out that audit quality is more important than the revenue of the auditors on an assignment:

[Our reputation is the most important aspect that we have (...) we would be falling behind with the competition when we deliver less quality than them. - Senior Director]

But one interviewee explained that sometimes when auditors can contract a big client in an important sector, that the revenue is in that case suddenly less important:

[Some potential clients can be market leaders, when it is possible to contract such a client, then as an auditor you are prepared to reduce the price of the audit. This of course will be still within the approval aspects for new clients. - Senior Director]

It is understandable that auditors say that the reputation and quality is very important in the audit profession. When performing a service, quality has to be well in order to stay ahead of the competition. At the same time however, there is some kind of race to the bottom happening where fee pressure from the clients determines whether an auditor gets the client or not. This aspect seems important because clients in the Dutch audit region have considerably good access to different Big 4 auditors. A Big 4 audit firm has to be efficient in their auditing in order to be the most appropriate auditor for the client. This brings the auditors to the tight spot they’re in. On the one hand there is the AFM who wants the auditors to perform more measurements during their audits and spend more time on the documentation. And on the other hand there is the client, who struggles to pay for these extra measurements. One auditor is very clear on this subject:

[We find ourselves indeed between the client and the oversight. But we have to be independent nevertheless. If a client does not want to co-operate than we are finished, then we are apparently not the right auditor for you. - Partner]

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This statement can be considered as an answer to subquestion 2.2, in the way that fee pressure is not a thing anymore. An auditor of today should act completely independent and should not act differently when under pressure.

4.2.2 Pressure of the client on the auditor to rely on the internal quality

mechanisms

Felix (2001) found that clients influence and sometimes pressure the auditors to rely on the internal quality mechanisms. In this study the interviewees were asked what is needed in order to achieve a high quality audit and interestingly, the quality of the work of the auditors was dependent on the accounting of the client:

[I believe it starts with the client, he must find it important to deliver us reliable numbers, perform good accounting and a governance structure which is stable. – Partner]

This is relevant regarding subquestion 2.3, because a client apparently has to be cooperative of nature. Interviewees further do not comment on the issue whether clients pressure auditors to rely on their internal audit function. This is interesting considering subquestion 2.4. Expected is that auditors do not feel the pressure from the clients to use the internal audit function, however it is expected that auditors try to be as efficient as possible and therefore try to use the internal audit function of the client. That means that the internal audit function has to be of such quality that it is helpful for the auditor. One interviewee points out that that is also important to pay attention to:

[You can come across several things during an audit and do you signal those back to the client. For example, a better potential within his internal control or risk that a client encounters. – Director]

Considering both statements from the interviewees, it looks like it that it is not the client that is pressuring the auditor to rely on its internal quality mechanisms, it is rather the other way around. Auditors are apparently depending highly on the internal audit function of the client and in their effort to increase audit quality they try to increase the quality of the internal audit function as well:

[If a client has a low quality of internal function and organization, then it is very difficult to perform a high quality audit – Director]

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4.3 Auditor,

4.3.1 Legitimacy of the auditors

Auditors recognize that they can be sometimes introvert of nature and that they, as professionals, don’t need anybody to lecture them. For example, through experience and knowledge in a specific industry or client, and the years they have audited a client, they really understand the processes and know where the risks are embedded in the organization. Through professional scepticism and professional judgement, they decide how they are going to perform the audit. Within this combination of skill and tenure hides at the same time a red flag, as the interviewees point out:

[In the last ten years, we lost contact with society (…) We knew what we were doing and at that moment you begin to listen less, and that is a human aspect (…) The last 3 or 4 years this did however improve. – Partner]

[The focus seems to go more towards the perspective of meeting the standards and have we documented it right. As a result, we were less focused on the business risks of the customer. The focus of our audits was too unilateral, this is our own fault. – Partner]

While the auditors say that they are experienced enough to perform high quality audits. They also admit that in the past there have been times that they have not been that sceptical and professional, as can be a result from a long auditor-client relationship (Chen, Lin, & Lin, 2008). This improved however over time and an example of how auditors are trying to ensure the quality of “their” work is to hire external experts:

[I come from a time that everything was done within the audit team, especially the valuations. Nowadays, when you sometimes have to perform a specific valuation once a year, you can say with ease that you are not capable enough to sign the valuation in name of your audit firm. (…) In order to keep the quality high, we therefore use some external specialists to perform the valuations for us. – Senior Director]

With the latest trend in mind, the development in IT, questions can be asked on how the auditor can manage in this highly skilled environment. IT gives the auditors more abilities to use substantive measures, as discussed earlier. This does however demand a more extensive skillset and the auditors don’t hesitate to yet again hire an external specialist:

Master’s Thesis MSc A&C J. Huiting