Q. Can auditors ask the truly tough questions? Aren’t they simply too beholden to management?
Auditing is a human science. We should admit that close client relationships, combined with the wrong mind set, can make asking tough questions a problem. But a good relationship is essential – is a bad one supposed to make asking tough questions easier? In 28 years as an auditor, I have never seen a critical situation where an auditor failed to ask the necessary questions of management.
Q. Is it fair that the audit profession has been blamed for failing to predict the financial crisis?
If governments, regulators, the IMF and the World Bank failed to prevent the crisis, it is unfair to blame auditors. But the profession has been shy – maybe even afraid – to discuss what an audit can and cannot do. If we had communicated better in the past, skepticism towards the profession would be less than it is today.
Q. If audits were not required, would we have them anyway? Do they create real value?
In Brazil, the number of companies required to have an audit is far smaller than the number that choose to have one. So I do think the audit is seen as having inherent value. Whatever the failures of our communication, investors think a third party attestation is vital. But are audits seen as having as much value as they should? I’m not so sure.
Q. In that case, how can the profession enhance the value of the audit?
We need to do more to explain our ability to detect fraud to the marketplace and to society. We need to be clear that when we issue a report on a particular piece of information, we are not giving an assurance on the whole business. And I think we could make our overall approach more predictive. This could never be insurance against the future – unless someone is willing to pay for it. But it could happen.
Q. How about public perceptions and the needs of the wider community?
I certainly believe auditors should be more available for informal discussions with external groups. A forum connecting auditors with economists and regulators could help to stabilize capital markets, if a working group could identify the key indicators to monitor before they turn red. If the profession could diminish the impact of future crises, it would create great value for the economy at large.
Q. What about audit opinions and public reports? Should they move beyond the current pass/fail format?
I would be very supportive of longer, non-standardized audit opinions. Something closer to a true report that spells out what we have – and have not – done. perhaps in future we could also look at issuing graded opinions. But users would need to understand that they could not rely purely on an auditor’s report when making investment decisions.
Q. Do you have any final thoughts?
I think we need to do much more in our communication, both formal and informal. That is what we’re paid for, so it is in our clients’ and our own interests to get it right.
Charles is Head Audit Partner for KPMG in Brazil and the South American Region. He joined KPMG in 1986 and has spent part of his career at KPMG in Germany’s Cologne office, providing audit services to international groups. In 1998, he was invited to develop and coordinate the Systems Audit department – Information Risk Management (IRM) at KPMG Brazil, before returning to the Audit department in 2004. Charles is also responsible for Brazil’s Industrial Markets department and Automotive.