Opening a dialogue with investors.
In a world where trust is at a low point and investors are asking for increased transparency and disclosure, sound corporate reporting and a quality audit are essential. What aspects of reporting are most useful to investors? What does audit quality mean? How must reporting – both corporate and auditor – evolve to better serve investors?
Financial statements remain a cornerstone of the current reporting model, but there is increased recognition that the current reporting model needs to change to remain relevant. There are many other information sources that investors are looking to in order to determine a company’s strategy, business model, risks, as well as its medium- and longer-term prospects. Many of this information is not captured in the current reporting model. The question is, should it be? What would it take to make corporate reporting better meet the needs of investors?
And if more of this investor-relevant information is captured in an annual report, should companies be asking: Would an auditor’s eye on this information be valuable to investors?
A financial statement audit – an external audit – provides investors with reasonable assurance over the financial statements. We believe that an audit of financial statements continues to be a crucial element in the corporate reporting chain. But we also believe that there is room for improvement and innovation. Over the past two years, we asked our stakeholders, including audit committees, regulators, standard setters and management, to share their insights into the most pressing issues facing the audit model, report and profession. We showcased highlights from these interviews on our Value for Audit web pages and economia magazine has written about the global roundtable series culminating in a summary report (PDF 1.3 MB).
Now we want to engage more widely with the investor community to explore what they want and need from corporate reporting and assurance – whether inside or outside of the financial statements. We are looking for a direct dialogue with investors to find the best ways to enhance audit quality and provide more value to investors while also addressing other stakeholder expectations, building on our discussions with audit committees and regulators on similar topics.
Enhancing audit quality is always the primary goal of auditors. Investors rely on sound information to support informed investment decisions. This speaks to a common goal. Does this mean auditors moving beyond just a binary report? Or providing insight on non-GAAP measures, both financial and non-financial information? Globally, changes are already in progress – from the new international standard on the expanded auditor report from the International Audit and Assurance Standards Board coming into effect in 2016 to the new EU audit regulation and requirements related to the mandatory rotation of audit firms.
In tandem with any regulation, however, there needs to be a better relationship between audit committees, auditors, management, and investors in order to make sure that audits provide the most value. Beyond the discussion between management, audit committees and auditors, should there be more direct communications between investors and external auditors? Direct communication to some degree could allow for more transparency regarding the audit process and ensure that the key stakeholders, the readers of audit reports, understand what information is being presented and ensure the corporate report meets their needs. And of course, keeping in mind that there is a balance to be struck as to what is communicated by the company itself, and the perspectives an auditor may be able to add in direct communication with investors.
Technological advances are having huge impacts on the way business is being done. The audit is no exception. Therefore, one additional area to consider is innovation – what role does data and analytics play in the audit, and what’s next on the technology horizon? New technologies and tools are making data review and analysis more effective, enhancing audit quality and surfacing new insights. Data analytics tools can help auditors to better identify risk areas and map potential exposure.
The future of audit is bright as far as we are concerned. We see many areas where as an audit profession, we can add additional value. The question we want to discuss is: which of those potential enhancements and innovations matter most to investors?
When it comes to evolving the audit, in the end, changes are only as valuable in as much as they help stakeholders, including investors, to make better and more-informed decisions. Engaging investors directly in the conversation is an important step in ensuring changes will reflect their needs and objectives.
This is why we are working with the International Corporate Governance Network (ICGN) – an investor-led network with a mission to influence, connect and inform stakeholders around corporate governance issues – to hold discussions with their members.
On 8 March 2016, we’ll host our first two outreach events as part of the ICGN’s regional Frankfurt Conference: a session focused on how to enhance the dialogue between investors and auditors to improve audit quality, followed by a workshop on the role investors can play in ensuring corporate reporting meets their needs. We will follow this initial conversation with further outreach at ICGN’s San Francisco Annual Conference in June.
The more discussion, the better. I hope you will join the conversation – either at the conference, or by following me on Twitter @KPMG #ValueofAudit, #ICGN16, LinkedIn, or by visiting us on kpmg.com/ValueofAudit.