A roundtable of global investors, governance professionals, and regulators shared their views on the roles and responsibilities of audit committees and auditors. Hosted by KPMG in the US and KPMG International at the International Corporate Governance Network Annual Meeting in San Francisco, the roundtable attendees also discussed what information they find most useful when evaluating financial reports.
Elizabeth Murrall, Director of Stewardship and Reporting at the UK Investment Association, told Scott Marcello, Vice Chair, Audit, KPMG LLP (US), that transparency of communications has been an important area of focus for investors.
Murrall explained that the Financial Reporting Council in the UK now requires audit committees to report on communications and significant issues addressed by the auditor in their audit committee report – and auditors, in enhanced audit reports, have to say whether they felt any information was incomplete. Auditors must also provide their assessment of the risk of misstatement in the financial statements, the level of materiality they adopted and the level of confidence they have in the internal control systems.
James Andrus, Investment Manager for Global Assurance, CalPERS; Elizabeth Murrall, Director, Stewardship and Reporting at the Investment Association; Bill O'Mara, Global Head of Audit, KPMG International; Scott Marcello, Vice Chair, Audit, KPMG in the US; Mark Vaessen, Global Head of IFRS, KPMG International.
This added transparency has “helped institutional investors with hooks to actually challenge management. These interactions [between the audit committee and the auditor] are no longer the black box that they used to be,” said Murrall.
James Andrus, Investment Manager at CalPERS, said US audit committee reports have too much boilerplate content. “We don’t know what types of decisions the audit committee makes with regard to the auditor [and], more generally, we don’t know what the audit committee actually does,” he said.
Investors may value the audit report, but they want more information.
Peter Butler, Founder Partner Emeritus of GO Investment Partners, understands the debate between finance directors and audit committees, and the judgments that have to be made.
“The level of transparency we need to get to is a proper debate on the material issues that affect the numbers,” said Butler.
“If an investor has the ability to understand the arguments … the investor can make his own judgments,” Butler added.
Transparency is clearly a global challenge.
Leonardo Pereira, Chair of the Brazilian SEC, said, “There is a wide gap in terms of quality, in terms of communications and, for the audit committee, how they convey the message.”
This gap needs to be bridged, even if it doesn’t happen overnight.
“We have to ensure that 5 years from now, when we look back, we have made some progress. It’s not the auditor alone who is responsible. It’s not the investor alone. It’s everyone,” said Pereira.
Peter Butler, Founder Partner Emeritus, GO Investment Partners; James Andrus, Investment Manager for Global Assurance, CalPERS; Elizabeth Murrall, Director, Stewardship and Reporting, The Investment Association; Leonardo Pereira, Chairman, Securities and Exchange Commission of Brazil (CVM); Mark Vaessen, Global Head of IFRS, KPMG International.
Mark Vaessen, Global Head of IFRS at KPMG International, said that, in the Netherlands, auditors walk through their audit report at the annual general meeting, giving investors a chance to ask questions.
David Shammai, Senior Corporate Governance Specialist at APG in the Netherlands, explained that such open communications might not work everywhere, but that, “Anything you can put out in the open to give investors an idea about audit quality is going to be welcomed … whether it’s through enhanced reporting, or whether through a face-to-face or direct interaction with the audit committee chairman.”
With respect to audit quality related issues, Marcello asked, “How do you get a lens into how those things are working?”
Butler said it is the independent chairman’s job in the UK to balance interactions between the CEO and the board. In Brazil, where companies often have strong controlling ownership, Pereira said he’s pushing for qualified audit committee members. “That is where you have more independence – and [can] mitigate an autocrat chair, CEO or someone still linked to the controlling owner.”
Cindy Fornelli, Executive Director of the Center for Audit Quality in the US, said that investor concerns go beyond audit quality. “It really is the whole reporting process that we need to focus on to make sure we don’t lose sight of the larger picture,” said Fornelli, pointing to non-GAAP financial information that is not as regulated as other information.
This comment prompted participants to examine how the role of intangibles has grown significantly over time and the speed with which intangible value can be wiped out.
Vaessen asked whether auditors have a role to play when it comes to intangibles. The response was positive, yet cautious – with participants saying that getting there would take time.
The discussion then shifted to risk analysis and risk identification that has become too boilerplate. Shammai said, “[Investors] read all the risk factors, but what is missing is how each is linked to the information that they need to rely on to make investment decisions.”
One of the participants asked Marcello how audit firms manage risk. Marcello answered that KPMG member firms, in addition to doing an annual assessment of client acceptance, “regularly re-evaluate the very specific risks relating to that entity [being audited] and how it should affect the scope of our work … the auditing standards require that and prudent judgment requires that.”
When it comes to risks, investors need to have a transparent view. Andrus noted that technology is a key enabler of transparency.
Marcello agreed. “Over the medium term, technology will not only enable companies, but it’ll enable the auditors to do significantly more.” Marcello highlighted KPMG in the US’ partnership with IBM Watson to pilot cognitive capabilities as one example.
Murrall said that more companies need to be open to reporting of the auditor’s findings, which some auditors in the UK have been doing on a voluntary basis, in addition to reporting on key audit matters and responses as required under the standards. She said investors in the UK have been disappointed with the current uptake of reporting on findings.
Murrall emphasized how important it is for investors to continue to push this and other innovations in transparent communication, “Because it’s the only way that companies will realize how important such issues are to their investors.”