During our two-year journey to discuss the value of audit with audit committee chairs, regulators, standard setters, investors and management through a global series of roundtable discussions, we learned about the pressing issues facing auditors relating to corporate reporting and the audit profession. I discussed the results of this project in a previous blog.
In March 2016, we launched an initiative to focus the discussion on the needs of the investor community. As investors are the primary users of audit reports, we wanted to understand the value they derive from reporting and how they would like the process to evolve. To engage investors, we worked with the International Corporate Governance Network (ICGN) to host a roundtable discussion at the ICGN Regional Conference in Frankfurt, Germany.
During the lively debate, we had investors from Europe, Japan, South Africa and North America discussing their key challenges with respect to corporate reporting. The conversation touched on three important topics – culture, governance and auditor mandate – each of which I will discuss in future blog posts.
Speakers in this video: Amra Balic (Managing Director, Head of EMEA Corporate Governance and Responsible Investment at BlackRock), Erik Breen (Chair, ICGN Board of Governors of ICGN and Manager SRI at Triodos Investment Management) and Mark Summerfield (Audit partner and Head of the UK’s Assurance practice at KPMG in the UK).
Investors raised a number of points regarding the reporting process, many of which came down to corporate culture. Investors do want to know whether the culture in a company is aimed at doing the right thing, including whether the focus of management is not only on the short-, but also on the medium- and longer-term. Does management have the right incentives? Is internal performance management aligned with what the company states externally as being important? The challenge is determining what the auditor’s role can be when it comes to evaluating the culture of a company. It’s not as simple as it looks – and yet, investors see it as instrumental. As Erik Breen, Chair of the ICGN Board, mentioned during the session, culture’s importance is, “why regulators are continuing to look at how to get a handle on it.”
Enhancing the governance and risk assessment process
Investors feel that another area where auditors can add value is providing more insights into the risks associated with a specific company – because current reporting doesn’t give enough detail. While auditors typically do a risk assessment as part of their audit approach, this preparatory work is not always visible to investors. At the same time, investors recognize the onus of ensuring good governance and risk assessment can’t entirely be on audit firms. Investors need to ask more questions, which means they need the opportunity to do so. They emphasized the need to look at means to improve the communication between auditors, companies and investors. The new expanded audit report was mentioned as an example of improving such communication, as was a more active role of auditors in AGMs, which is practice in some countries.
Many of the investors at the roundtable agreed that it would be good to get more insight into the robustness of a company’s risk and compliance system, more knowledge of the cultural aspects within the company, and more insights regarding prospective information. To be able to deliver on these types of insights, however, the mandate of auditors will need to be expanded beyond the changes currently being considered. Investors recognized that they need to help drive this change.
The ICGN roundtable and panel discussions were an excellent beginning to our dialogue with investors. See how the social media conversation unfolded. We look forward to expanding on this conversation at ICGN’s San Francisco Annual Conference in June.