One of the most talked about issues from an investor perspective is the need for more transparent communication between auditors, audit committees and investors.
At the recent This International Corporate Governance Network (ICGN) Annual Conference in San Francisco, KPMG hosted a roundtable to discuss the roles of audit committees and auditors, and how they might evolve to provide even more value to all stakeholders, particularly investors. This roundtable and a related panel discussion followed on the heels of a number of thoughtful sessions held at the ICGN’s Frankfurt conference in March, which focused on
identifying key audit issues for investors.
When it comes to the relationship between investors, auditors and audit committees, roundtable participants not only identified the need for more transparent communication, but they also discussed what that transparency could look like. Read on for key outcomes from the discussion.
Investors want more insight into the conversations audit committees and auditors are having over the course of an audit. They want to better understand what the auditor discovered and how their discoveries were addressed by the audit committee. This transparency is already happening to some extent in the UK, where the Financial Reporting Council (FRC) now requires audit committees to report on communications with the auditor and on any significant issues addressed. On a broader spectrum, in January 2015, the International Auditing and Assurance Standards Board (IAASB) issued new requirements on auditor reporting, effective for December 2016 year-ends. Without changing the scope of an independent audit, the new requirements open the door for the auditor to give users more insight into the audit and improve transparency.
James Andrus, Investment Manager for Global Assurance, CalPERS; Elizabeth Murrall, Director of 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
Investors are particularly interested in those ‘gray areas’ where significant judgments are being made by both the company and the auditor on material issues that might affect a company’s financial numbers. The more insight they get on these, the better they can make their own judgments regarding the potential of the company and any associated risks.
Investors noted that there is still too much boilerplate reporting of risks by companies, perhaps in an effort to cover all the bases. They would like to see more specificity with respect to the risks being reported. It’s not that investors want companies to be risk averse. Calculated risk-taking is needed for a company’s growth — no risk, no reward. Rather, they want to be certain they understand the scope of key risks correctly and that they are making decisions based on the most relevant information available. In this context they also value the auditor’s perspective on the most significant risks. In the expanded auditor report, the auditor does report on these in selecting the so-called key audit matters.
The key message investors are sending is that this is about more engaged dialogue and better communication, not simply more information provided in reports.