According to Knechel, part of the auditing definition is ‘an economically motivated professional service designed to reduce information risk’, which is forgotten too often. Sometimes this gets lost in scandals, regulatory interventions and defensiveness. Knechel strongly believes that auditing and financial reporting occur in an ecosystem, with many moving interdependent players. Participants have to collectively produce the financial report. It doesn’t happen in isolation. Also, the audit is inherently a cooperative exercise: to audit means to interact with the client. And interactions influence attitudes. This means that the objectives of some participants in the network will align with the auditor’s objectives, while other will not, and this can change over time. The key is that professional skepticism is most critical when objectives do not align. This concern applies to all participants, not just the auditors. Other participants also have to play their role. If they break down, is it the auditor’s fault? Can the auditor compensate? We often don’t know.

We live in a world with an information super highway, with lanes containing information concerning ESG/CSR, cyber, forecasts, MD&A, non-GAAP and 10K/10Q. Only the last lane is audited. Users don’t know if all the other information is accurate, relevant, reasonable, realistic, true and fair. The critical question is whether expansion of the attention of the auditor into a broader universe of subject matter undermines or helps the statutory audit. And whether the audit firms can do it. These ideas lead to the concept of a multidisciplinary firm. This concept has become somewhat loaded. Will it de-emphasize the audit? Maybe. We need to think about it. We cannot deny the effects of the rapidly changing ecosystem. How do firms have to adapt? And regulation? The immediate challenge is that there are market forces who would really like auditors to do more.

The more independence and competence, the higher the quality is going to be. If independence is low and competence (knowledge) is low there is no economic value. At the other extreme (very high competence and independence), there still will always be a residual risk in an audit. However, research evidence shows that audit risk is very low on the vast majority of audit engagements. The two remaining conditions are more interesting to talk about: low competence and high independence versus high competence and low independence. Regulation pushes the audit into the area of high competence and high independence. But nothing goes up forever. Economists give us a sort of an answer in terms of the law of diminishing marginal returns. For example, auditors have to interact with the client to conduct the audit and, because of basic human nature, that interaction has the potential to undermine some of the auditor’s objectivity. If the independence rules are pushed to the limit, this will have an effect on the ability of the auditor to generate the appropriate expertise and knowledge. Hence, a too high independence may cause a loss of competence. In short, auditors have to interact with the reporting ecosystem. If you fence that off, it causes potential limitations.

Knechel participated in a study in Australia where the researchers spoke to regulators, standard setter, accounting firms and audit committees. They heard two different viewpoints. The regulators said that more regulation will lead to better audits. The rest of the interviewees indicated they were not so certain about that. They perceived the substitution of compliance for meaningful more substantial audit work.

But why would people behave counter to what the goal would be? Well-established theories in economics and psychology show why regulation does not always work. Hence, if we want to think about the economic value proposition of auditing, we need to think about what this ecosystem looks like, what our role is in it and what the appropriate level of regulation might be.

The IAASB has some history with taking research on board. The best example probably is audit reporting, which started with the question what needs to be done to help users of auditor reports to better understand the audit and the financial statements subject to audit. The IAASB, together with the AICPA, commissioned research to four research groups from all over the world.

The starting point is of course: you shouldn’t draft standards out of the blue, it should also be evidence based. That makes sense. At the same time, this is not an easy task. One of the reasons is that research takes time and often there isn’t much time. So, there is a tension. The best thing that can be done, collectively, is to look forward in a timely way. What is coming up on the agenda?

It is difficult to draft standards which are completely evidence-based. But the whole process is organized to integrate the basic idea underlying the evidence-based approach. Drafting standards is not done by the board on its own. It includes consultation, listening to regulators and practitioners and standard setters. That may not be fully evidence-based, but it certainly is somewhere in the middle. In the end, it is about bridging the gap between theory and practice. The accessibility of research to standard setting boards is important. One of the suggestions in Leuz (2018) is that one step could be a sequence of surveys asking what comprises the set of policy-relevant results that are well understood and reliably estimated. It is extremely helpful to bring that information together.

The idea of evidence-based regulation is valuable. However, we’re not there, yet. There are problems, which are clearly described in Leuz (2018). Particularly in the auditing environment, many factors influence the impact of each regulatory measure. Think, for example, about political pressure and conflicting aims of regulation. It is difficult to isolate and measure the effects of the impacting factors. Furthermore, an important issue is how we can get the right data. This holds especially for pre-implementation of regulation, but also for post-implementation review of the effects of regulation. From that perspective, the approach of the Commissie Toekomst Accountancysector (CTA) is promising. They try to gain a clear picture of the relevant issues based on various inputs. They use science in an exploratory way, to analyze possible quality measures. For example, they used the AFM-report as input. It provided them with information on alternative business models, which stimulated further thought regarding possible suggestions. This is a good example of how academic evidence can be used in making policy recommendations.

Hence, evidence-based regulation is a good thing. However, if we don’t know all the effects of regulation, that does not mean that no action should be taken. We should improve developing insight pre- and post-implementation. Therefore, we have to work on further improving dialogue and developing research.

We should strive for, in the spirit of Leuz’s point, practitioner (including standard setters and regulators) informed audit research. But how do we get to an ecosystem with an infrastructure to help regulators and standard setters have evidence informed audit standard setting and regulation? Several things come to mind. One of the things starting in a number of US universities is a new performance metric that is called ‘engagement’. Under this umbrella the key point is having face time with leading practitioners in auditing (but also in other fields, like marketing). That is an important part of the ecosystem. However, until today, this FAR conference is a very positive outlier in the extent to which practitioners and academics interact.

Another way to achieve our goal is to change the research production process, so that academics have to be informed about the environment that they are researching. This would mean that academics have to talk to real life practitioners, regulators or standard setters before they dive into the research. Another positive movement is that universities in the US are hiring more and more clinical professors, who combine practice and academia and who have a different view at this. Another thing we can do is to mentor and to encourage young scholars.

During the panel discussion, a major case was made for tearing down the walls between experimental and archival research silos and for using alternative research methodologies. Regulators, standard setters and policymakers care less about the methods and instead focus on the answers to policy questions. We should find ways to organize research and conferences around topics and policy questions, bringing together scholars from different fields using different methods.

Furthermore, during the discussion, again the importance is stressed of bridging the gap between academia and practice. It was stressed that conferences like the FAR conference are necessary to offer practice summaries of research, since most auditors in practice ‘hardly ever walk around with research papers in their suitcases’.