February 2023
How do you create a good environment for auditor scepticism and challenge? Professor Karthik
Ramanna took a look at the latest FRC report and says what he thinks needs to happen.
More on-the-job and âsoft skillsâ training is needed in the art of challenging clients if we are to create the sceptical auditor, says Professor Karthik Ramanna.
Looking at the FRCâs new report setting out examples of good practice to improve auditor scepticism and challenge, he suggested that audit firms do a reasonably good job training their rankand- file in the various technical standards and processes that characterise the modern audit.
But these deductive skills are only part of what is needed from auditors. Beyond deduction, auditors need to possess skills in critical thinking and judgement. Ramanna explained: âCritical thinking is the basis for professional scepticism, which is the foundation for challenge in audits. And judgement is what finally determines âwhat matters from the restâ (to quote Isaiah Berlin) when making an audit decision.â
He stressed that neither critical thinking nor judgement can be taught through textbooks and professional certification exams. âThey are most effectively taught through the case-study method of education, where students are exposed to a series of challenging scenarios without any manifestly correct answers, and where they must debate and reason with each other, under the thoughtful guidance of a facilitator, on how they will decide on the matter.â
Ramanna insisted that this Socratic-style education is the on-the-job learning in soft skills that (especially junior) auditors are crying out for.
An urgent next step is then to train the trainers (i.e., audit partners and engagement managers) in imparting this education to their mentees. He said this will involve getting otherwise garrulous audit leaders to themselves embody the practice of active listening as a way to inspire and mobilise their juniors into this mindset.
Beyond critical thinking and judgement, he suggested another essential element of challenge that is underdeveloped in audit education is the art of disagreeing without being disagreeable. Ramanna explained that this is what the Stoics referred to as âdialectical sophisticationâ â the ability to manage emotion and impulse whilst serving a mission or doing oneâs duty. It is the basis for effective challenge, particularly in the current environment where auditors must challenge those who seemingly make the decisions on whether they stay or go and how much they must be paid.
Another element he said needed training that may have emerged is that Millennial and now Gen Z workers find it uncomfortable to challenge a client. Younger workers may be unfairly classified as wallflowers, but there is little doubt that they have enjoyed more âsafe spacesâ throughout their schooling years than prior generations, potentially making them less comfortable with even constructive confrontations.
Read the commentary on the FRCâs Publication, What Makes a Good Environment for Auditor Scepticism and Challenge, prepared by Karthik Rammana, at https://tinyurl.com/ebc8nkkk
