In speaking with KPMG audit leaders across our network of firms, there is consensus on several fundamental points: the audit is vital to the effective functioning of the capital markets; the profession is committed to high quality audits; but the audit needs to evolve in several important ways if it is to retain the confidence and trust of investors and external stakeholders.
Audit is vital to trust in financial information, and it’s this trust that turns the wheels of the capital markets system. It is the independence that auditors bring, the objective scrutiny, which gives the business community confidence in the numbers. Without audit, that trust may disappear.
There have been concerted efforts in revising standards, looking at the extent of work that auditors need to perform over risk assessment, and other information that underpins the preparation of financial statements and the judgments that underpin critical assertions.
Hand-in-hand with this has been a growing emphasis on exercising professional skepticism and independence. As a profession, we have been focusing on exercising professional judgment, so that we fully consider potential biases and appropriately challenge management's assumptions and estimates.
All of this being the case, why then is the audit in danger of losing the confidence of some outside parties? Why does it — as virtually all of my colleagues and stakeholders we’ve engaged with acknowledge — need to evolve?
One of the keys to this is that the audit concerns itself with historical data, rather than real-time or forward-looking information, which is what many investors have become more interested in.
It’s like looking in the rear view mirror of a car. It can be interesting — but it’s not so relevant to where you’re going.
It was this backward-looking focus that perhaps lay at the heart of the problem when, after the financial crisis, the outside world asked questions of auditors. Although audit quality didn’t contribute to the crisis, it became clear the world expected more from us in terms of communication. The growing adoption of expanded auditor reports that give much greater insight into the key judgments and considerations in the audit has been well-received as a meaningful response to these concerns. They give investors and other stakeholders a much clearer window into our work.
From my discussions with KPMG partners, we agree that the challenges facing the audit are multiple: to become more forward-looking; to increase the quality and quantity of communication with stakeholders; to move beyond a narrow pass/fail opinion and give more detailed and relevant insights into the challenges and risks facing a company (beyond what is currently provided through the expanded auditor report), to embrace technology and become more innovative.
These are the challenges that the audit faces if it is to retain the trust and confidence of its many stakeholders.
We agree that the expanded auditor report was one of the most important steps the profession needed to take.
That was just one step in our continuing journey. There is further to go and much to do as we seek to retain and build the confidence and trust of the financial community in the audit.
All references to 'KPMG', 'us' and 'we' refer to KPMG's network of member firms.