Speakers in this video: Ingmar Rega (Chief Performance Officer at KPMG in Germany), Jens C. Laue (Audit Partner and Head of Governance & Assurance at KPMG in Germany) and Marc Hogeboom (Audit Partner, Financial Services at KPMG in the Netherlands)
At the ICGN Conference in Frankfurt, Germany, there was a lively roundtable discussion highlighting opportunities to ‘bridge the gap’ between investors and auditors. George Dallas, Policy Director at the ICGN kicked-off the conversation by saying how critical audit quality is for investors.
Mark Vaessen, Global Head of IFRS at KPMG International, highlighted KPMG’s work on the Value of Audit program, but noted that - since investors were the ultimate end client of an audit, it was important to gain their insights on audit quality, the role of audit and audit innovation. He asked, “What do investors actually want to know about the audit process?”
Alison Kennedy, Governance and Stewardship Director at Standard Life Investments, said increasing audit quality has been a positive trend. “The auditor reports we’re getting in the UK are increasingly useful,” she said. She noted that the key accounting judgments, the key areas of audit risk, the materiality, and the scope of audit were “the kinds of markers that give us confidence in the overall robustness of the audit and the audit process.”
Amra Balic, Managing Director, Head of EMEA Corporate Governance and Responsible Investment at BlackRock suggested that while information is important, there needs to be a balance. “We go through the stages where we’re asking for more and more … and then get to the point where there is so much [information] that we can’t see. I don’t think it’s a question for us to see more. I think it’s a question of what exactly needs to be included in that information, and really knowing the information we get is relevant information. So we need to go back to cut the clutter.”
In other words, quality is more important than quantity – and quality often comes down to the audit team. Anne Molyneux, Director at CS International said, “We are looking at how you generate skepticism in your audit teams.” As a next step, she would like to see auditors asking more questions and looking more at what’s behind the numbers.
David Couldridge, ESG Analyst at Investec Asset Management added that he wants more on prospective information. “We’re trying to invest client capital into an uncertain future and we need everything possible in this overall system of governance to work in a way that [shows] those earnings we’re checking out into the future - that we can have some confidence in them.”
While there is a lot of information in corporate reporting on accounting treatment, judgments, and other things, Vaessen noted that reporting is very limited on prospective information, the compliance culture, and the compliance model.
On the compliance side, Erik Breen, Chair of the ICGN Board, said that investors do not want a checklist approach. “What’s really necessary…” he said, “…is to have ingrained in the audit firm itself a culture where there is trust beyond doubt that if an auditor from that firm gets into a certain situation he does the right thing.”
The risk associated with audits of specific companies generated a significant amount of discussion, along with the need for the audit firm to be clear on those risks. Carsten Eisele, an audit partner at KPMG in Germany said that, while it might not be visible to investors, one of the first steps in an audit is, “To establish the right order of approach - which is based on our risk assessment.” He added that, “We share this with the audit committee if they’re interested in it.”
At the same time, investors need to challenge the auditor on his or her opinions if necessary. Marc Hogeboom, an audit partner in financial services at KPMG in the Netherlands, said that in the Netherlands, auditors are obliged to be onstage during the shareholder’s meeting and to present key audit matters. “This is really added value,” he said. “For the investor, it creates the opportunity to directly challenge the auditor on any aspect of the audit.” This may be a step forward in further shaping and improving communication between investors and auditors.
Many of the issues investors have come down to culture, Breen suggested. This is why regulators like the IIA, IOSCO, and the FRC are continuing to look at how to get a handle on it.
George Iguchi, Head of Corporate Governance at Nissay Asset Management agreed. “A deeper scope of work on culture might increase the quality of [the] whole audit report, rather than lead to new reportables,” he said.
The question of company resistance to the release of more information was cited. Balic countered, “I think if you think about what people used to consider, what companies used to consider, as confidential, those who are wanting to say ‘Our governance is better’... is why [they’re] slimming down that which they really think is confidential and competitive and giving out far more information now. I think that will then lead to all these other areas – and us wanting and getting a little bit more attestation on them.”
Mark Summerfield an audit partner with KPMG in the UK noted such an expansion of scope was feasible. “All of the audit firms have the skill sets to give you opinions around risk management, around the process of creating strategy, around risk appetite, and around the effectiveness of audit committees.” In order to change, however, there would need to be significant demand from investors.
The roundtable discussion ended with recognition that audit quality is critical, but not the only issue. Investors want auditors to go deeper, to look at compliance and culture. Participants agreed that to make this happen, auditors and investors need to continue to work together.