In the wide-ranging discussions that KPMG hosted across multiple locations with key stakeholders including investors, audit committee chairs, regulators and standard setters, the question of how to bolster confidence and trust was never far away.
And while one of the focuses was how to retain confidence and trust in the audit itself, the issue of trust clearly emanated much more widely across the whole corporate chain with implications for every party involved.
The critical importance of the audit was something that everyone was in agreement on, whether the conversation took place in Europe, Asia or the Americas. Investors rely on the auditor as the ‘gatekeeper’, and trust in financial statements is essential.
In this context, it is obviously vital that audit quality is high. But there was agreement that quality is in fact difficult to measure. Several discussion participants commented that quality is hard to ‘pin down’, though in this respect some found the annual reviews of oversight bodies useful. Auditor independence is also critically important.
What is essential is not just independence in fact but the independent state of mind that comes from adopting an objective stance. Skepticism was seen to be an important quality. These attributes of quality, independence and skepticism are the core ingredients for the audit to retain and build the trust that stakeholders in the capital markets place in it.
However, it is not as simple as that — because there was also a recurring recognition across the discussions that the audit needs to evolve with the changing times if it is to meet investor needs.
A number of participants in the discussions raised the concern that the audit’s focus is on historical information — a largely backward-looking view. But what investors are increasingly looking for is assurance over prospective information. They are looking for more information about risks and uncertainties, about drivers of longer-term value creation, and the measurement of those.
Providing broader assurance, including over more forward-looking information, is a key challenge and perhaps even a future imperative in many participants’ view facing the audit. As noted earlier, the trust challenge is by no means limited to auditors. All parties have issues to grapple with. Many discussion participants stressed that audit committees have a key role to play. They have to be active participants in the system of checks and balances and, at appropriate times, challenge management — for example, if the reporting of non-GAAP numbers is not consistent from year to year. The critical importance of having strong internal audit teams was also noted by many.
Another key issue is that there needs to be better engagement between audit committees and investors. Some audit chairs observed that, while there is more written dialogue now between committees and investors, they would welcome more feedback from investors on the information they provide so that they know whether or not it is serving its purpose effectively.
On their side, investors are concerned that audit committees and company management should give them all the information they need — for example, with better reporting around longer-term value creation, including non-financial information, and strategy. There was a perception among some investors that companies remain reluctant to disclose certain information, because of the fear that they will lose competitive edge or, sometimes, from litigation concerns. The instinct is often to say as little as possible — when it is full and transparent communication, alongside the financials, that investors feel they need.
In short, for confidence and trust to be maintained, there are a raft of issues to be tackled on all sides. The common thread is for better engagement and communication. Ultimately, it is better understanding between each party that will drive higher levels of trust.
All references to 'KPMG', 'us' and 'we' refer to KPMG's network of member firms.