Reliable financial information and high quality audits have always been important to the stability of the capital markets. In the current legal and economic environment, auditors and audit committees are subject to increasing levels of scrutiny: the auditor in exercising professional scepticism and ensuring quality audits; and the audit committee in discharging its corporate governance responsibilities.
To date, little guidance has been available to help companies and their audit committees understand the quality of their audit.
KPMG’s Transparency Report: Unlocking Audit Quality outlines processes and inputs that KPMG believes drive a quality audit, providing insight into how we ensure every audit is a quality audit. The report also reflects on the role that Boards and Audit Committees can play, through their decisions and actions, in influencing key factors within their control which enhance audit quality. Key indicators to assist in the evaluation of the performance of external auditors are also included in each chapter of the report.
Duncan McLennan, KPMG National Managing Partner Audit commented, “Increasing risks and pressures make it important to understand the role of the auditor, and what the auditor does to support a quality audit.”.
For the second year running, KPMG is the only Big 4 firm in Australia to voluntarily produce a Transparency Report.
“There is no Australian legal requirement for audit firms to produce a transparency report; but as audit quality is central to our identity, and defines our behaviour, we believe it is important to be transparent about how we safeguard the quality if our audit service,” McLennan continued.
KPMG’s leadership in this area has been acknowledged by the profession, with public endorsement of the report by the Institute of Chartered Accountants in Australia (ICAA), and citation of the Transparency Report as being instrumental in being awarded the 2011 CFO Dealbook Audit Firm of the Year award.
Lee White, CEO ICAA states in his foreword, “This second report reinforces the firm’s commitment to openness with its clients and the public, and continues to explore our understanding of audit quality and how to measure it.
“KPMG’s leadership in demonstrating transparency contributes to improving corporate governance at a time when regulators, capital markets and investors are greatly focussed on the role and responsibilities of audit committees and the drivers of audit quality,’ White said.
Safeguarding the integrity of financial reporting:
Safeguarding the integrity of a business’ approach for truthful and factual financial reporting can support audit quality. Boards and audit committees play a constructive role in indirectly influencing audit quality. A practical approach to achieve this includes:
- reviewing whether committee members have the right credentials and experience
- educating audit committee and board members in financial reporting matters through seeking learning opportunities
- updating the understanding of significant risks facing the company, anticipating risks and determining the ability to manage them
- challenging the nature of market disclosures, giving due consideration to integrated reporting, regulatory developments and shareholders’ appetite for greater assurance beyond historical financial reports
- assessing disclosures to ‘cut the clutter’, allowing the reader to gain a clear view of the financial position, performance and risks associated with the operations, while remaining compliant with the accounting and disclosure requirements
- ensuring a process for drafting disclosures early in the reporting cycle exists
- allowing adequate time for the directors’ review of financial statements and other market disclosures
- using personal knowledge of the company, its activities and risks, to question the final compiled statements
- developing a basis for evaluating the auditors’ performance, including gathering feedback from those who interact with them, and communicating the results of the evaluation
- assessing whether the finance function is fit for purpose, including the quality of the financial reporting team, and, where required, sourcing additional skill or resources
- reviewing the implementation of the control improvement suggestions tabled by the internal and external auditor.