5 minute read 10 Feb 2021
Bicycle mechanic with laptop

Why high ethical standards and healthy scepticism are more important than ever

By Marie Treacy

EY Ireland Assurance Partner

Technology Sector Leader and Audit Compliance Principal.

5 minute read 10 Feb 2021
Related topics Audit Assurance COVID-19

The unique conditions created by the Covid-19 pandemic have created a range of challenges for auditors and accountants in the execution of their duties.

In brief
  • A combination of technology and practical solutions is required by auditors when dealing with the very different environment created by Covid-19.
  • Auditors need to bring the highest ethical standards along with a healthy sense of scepticism to bear when reviewing audit evidence.
  • Fraud risk is greatly increased during periods of turbulence and uncertainty.

While businesses deal with the day-to-day challenges presented by the pandemic and the uncertainty ahead, professional accountants are faced with new ethical dilemmas which require us all to exercise our professional expertise and moral judgements. Ethics is the foundational bedrock of the profession and the challenges presented by the pandemic and new ways of working have reinforced the importance of upholding the highest standards of ethics.

The pandemic restrictions of the past 10 months mean that, in many cases, audits must be carried out remotely. On a practical level, technology has been key to facilitating this. EY was fortunate in already having its technology-driven Client Portal, EY Canvas (our online global audit software) already online prior to the pandemic.

However, software is only part of the solution. We still had to find practical solutions and workarounds to issues like the observation of inventory counts which are still required to avoid a limitation of scope on the audit. While some counts proceeded with physical attendance, virtual solutions were required for many cases and our audit teams quickly pivoted to technology-enabled means of collaboration to perform counts remotely.

Original document inspection has been a challenge for all professional services firms with COVID restrictions creating an additional authentication risk to be addressed.  If we receive audit evidence from management in an untraditional format or by a different means than usual, the authenticity of the audit evidence must be verified. Risks include signatories not being who they say they are, signatories not being authorised, and documents being altered.

It’s likely there isn’t an organisation in existence that hasn’t been impacted to some extent by increased economic uncertainty. This risk presents significant financial reporting implications, with increased risks of material misstatement that require careful analysis and judgement. This means that applying due care, competence and professional scepticism are absolutely essential.

In EY we launched a new Active Scepticism Framework in September 2020 that helps our teams apply a heightened professional scepticism while also being conscious of both internal biases and external factors.  Auditors need to consciously move away from a mindset of corroboration to one where they seek relevant or contradictory evidence. Auditors will have to be very conscious of the need to consider most likely as well as reasonably plausible downside scenarios in assessing areas like going concern and the use of estimates and judgements.   

Auditors also need to understand the pressures on clients, including the pressure for results to meet market expectations, debt covenant requirements etc.   

The impacts of the COVID19 pandemic will likely increase the conditions that potentially give rise to modifications to auditors’ opinions, especially in certain sectors, but this is not inevitable – it will depend on the facts and circumstances of each entity and the exercise of proper, well informed judgement.

Guarding against unethical conduct

High-stress environments can create a breeding ground for the perpetration of fraud. Pandemic restrictions may also cause a breakdown in, or result in changes to, fraud identification and prevention programmes and controls. Fraud risk may be increased as a result of the control environment being impaired during the pandemic due to restrictions on travel, business remaining closed leading to controls not being able to be performed, or not being performed properly due to lack of appropriate oversight and review. Auditors therefore need a sharpened focus on various fraud risks at our clients and to be increasingly vigilant.

For example, an inability to maintain an appropriate ‘tone at the top’ may result from reduced interactions or communications with employees; audit committee reviews, interactions and meetings may not be occurring or are occurring remotely, possibly resulting in less effective oversight of the entity’s financial reporting processes; and internal audit activity may be suspended or reduced.

We consider the effects of the pandemic on the control environment when we are determining our audit strategy. As auditors we must always maintain a healthy amount of professional scepticism in assessing fraud risks when planning and executing our audit procedures; heightened consideration of the fraud triangle of motivation, opportunity and rationalisation; and increased involvement of forensic and other experts to assist with fraud identification and detection.

Summary

The adoption of entirely new organisational and business models during Covid-19 has underlined the need for accountants to maintain the highest ethical standards at all times. Pressures on organisations of all types have never been higher and this increases the risk of financial misstatement and fraud. Auditors must be at their most vigilant to guard against these risks with every statement and piece of evidence being checked and double checked for its veracity.

About this article

By Marie Treacy

EY Ireland Assurance Partner

Technology Sector Leader and Audit Compliance Principal.

Related topics Audit Assurance COVID-19