“For all large public companies, the audit report is now not just a binary pass/fail report, but one that includes a specific commentary by the auditor highlighting areas of heightened risk of material misstatement, and how the audit effort addressed those risks. This is but one step in an evolution which demonstrates that the profession is more than capable of delivering a narrative based audit report that demonstrates the value in audit.”
Conall O’Halloran, Head of Audit, KPMG in Ireland
Audit has proved its worth over the years, to investors and companies alike. But as the events of the last decade have shown, in Ireland as well as globally it’s time for change – for a revolution in audit thinking and execution. Business has changed, shareholder needs have evolved, and audit needs to keep up. That’s why we created this project.
When we started thinking about the future of audit, we wanted to find out where we are now: whether lead partners from KPMG member firms in different regions thought there was value in audit today, and if so, what this value is. But more importantly, we wanted their ideas on audit’s current weaknesses and on how we, as a profession, can address these to make the audit more relevant to twenty-first century business.
The comments made in the following pages by partners from across KPMG’s network of member firms are their own and made in the context of their role as experienced auditors. Though the partners’ responses were clearly defined by their personal ideas and experience, a number of common messages emerged.
All felt that audit still has relevance and value. This value mainly derives from confirmation over historic financial information, as shown by the resulting reduction in the cost of capital. They also affirmed that audit quality has been improving since the Enron collapse. The financial crisis has put renewed focus to push these improvements along, but it is basically furthering an agenda that was already well underway.
The value of an audit, however, highlights its major limitation: it only deals with historical financial data. Although an audit reduces the cost of capital, it has less – some would say declining – relevance to capital markets. Investors are more concerned with what drives share price and organizational value than with annual reports.
For audit to stay relevant, we need to start looking at what creates value in a business. More integrated thinking so that companies consider how they report more holistically will help. But we need to get involved in understanding entities’ real business value drivers so that we can give assurance over these drivers, as this is where we personally believe market demand is going to take us.
This leads to the final point: innovation. Until recently there has been little impetus for the audit profession to develop. But all those interviewed for this project are adamant that innovation around inputs and outputs is absolutely critical in order for the audit to stay relevant. Regardless of legal and liability implications, the profession needs to get moving on creating a new reporting and assurance model that works for tomorrow’s business world.
The profession as a whole is furthering this public policy debate, and KPMG intends to be a leading voice in this discussion. We are serious about change and about having an open dialogue to see how that change can happen in the best possible way. We invite you to join in the conversation by visiting us at kpmg.ie and helping us shaping the future of corporate reporting.