The audit remains a highly valuable and important part of the workings of the capital markets. But, as KPMG partners and colleagues I have been speaking to across our network acknowledge, it has to evolve if it is to retain its relevance.
Why is this? One of the principal factors is that the audit remains primarily an examination of historical financial information — but investors are looking for more forward-looking and contemporary information. They are also interested in other information that drives share price and value creation.
An audit cannot be more relevant than the information that is subject to the audit — and so if investors are interested in information outside of the financial statements then does the scope need to be widened? And if so, what would need to happen to make this feasible?
Nowadays, investors are increasingly making their decisions based on adjusted non-GAAP earnings and non-financial metrics. They are making decisions based on information about a company’s pipeline, same-store sales growth, oil and gas reserves, etc. They look at human capital management, at how a company is able to develop its customer relations and, more generally, at how sustainable a business model is for the longer term. Many of the metrics that give information on those key matters are not in accordance with GAAP or derived from financial statements or systems. It’s those non-GAAP measures, both financial and non-financial, that are driving the market capitalization of the world’s biggest companies. Those metrics typically have no form of independent attestation. There was a view among colleagues I’ve been speaking with that, in the future, the market and investors are going to need, or potentially demand, some form of independent assurance as part of the audit.
How do we remain relevant when a greater and greater part of a company’s value is either an intangible asset (that’s not on the emerging business models in the shared economy) on the balance sheet or some kind of intangible value (brand and reputation, other non-financial data) that’s not even recorded?
In fact, auditors should be in a good position to offer assurance over a wider set of information or data. After all, auditors have broader access to a company than almost any other entity or profession. Auditors certainly have the skills to provide more information in more difficult judgmental areas.
Indeed, auditors are already doing this — in the views and insights that we provide to audit committees about internal controls, risks, IT systems and other issues. However, at present, this remains mostly an internal conversation that we don’t replicate with the readers of our reports, who are principally the shareholders.
In a sense then, it is a communication issue — which was another key strand of the discussion that we have summarized here.
A number of my colleagues have reflected on an expansion of work that would give investors a deeper view. Some even considered the possibility that the auditor could, like a rating agency, give a grading on the company itself.
The expanded auditor reports that have been introduced in a growing number of countries around the world do indeed give a much fuller view of the auditor’s judgments and considerations and have widely been viewed as a positive development.
However, there undoubtedly remains more for the profession to do to bolster its relevance. Could we perhaps reach the point where we have a continuous audit process and provide assurance on information on a contemporaneous or real-time basis?
It’s a fascinating subject that goes to the heart of the audit’s relevance and one which we look forward to continuing in the next phase of our Value of Audit project.
All references to 'KPMG', 'us' and 'we' refer to KPMG's network of member firms.