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Audit reports - field testing a bold idea 

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The new ‘long-form’ audit report is the biggest change in audit reporting I’ve seen in my professional career and one I am really positive about. Back in November, we asked if the new report was a long term solution or whether we could go further. We also said that we were committed to innovation, and that’s what we have done.

Beyond the minimum requirements 

 

We have put our commitment to the test by issuing a small number of ‘long form’ audit reports that extend beyond the minimum requirement: audit reports that do not just say what we did in the risk areas, but also say what we found. And we haven’t done this on a mocked-up, illustrative example. They are real, ‘live’ reports to the companies’ shareholders.

 

In our update “Audit reports – field testing a bold idea” (PDF 1 MB) I explore this innovation in more detail and say that we need a debate about whether this is the future of audit reports. 

 

That debate needs to involve all the stakeholders: the investor community, as they are the shareholders for whom the report is written, and company boards, as the audit is about facilitating the relationship between companies and their shareholders. We also need buy-in from regulators, who would need to revise their standards to require these reports more widely.

 

Issues to consider 

 

There are plenty of issues to think about:

 

  • To be valuable, findings would need to be graduated, rather than binary (acceptable vs not-acceptable) – but consistently communicating such ‘gradings’ would not be easy.
  • For companies, would it be a demonstration of commitment to good governance?
  • Or would it slide into replacing the board’s accounting judgments with the auditor’s?
  • How do we overcome barriers around commercially sensitive information?
  • In a voluntary regime, would there be risk that shareholders would draw the wrong conclusion about companies that didn’t volunteer?

 

So I’d be grateful if you would take a few minutes to read through the update, and perhaps leave a comment or view on this page. I appreciate that these are sensitive issues and that the debate might be lively or even disruptive, but I welcome that. There’s no progress without taking the risk of a wrong turn. 

 

Tony Cates - Head of Audit at KPMG in the UK

 

What's your view?

Comments received

 

18. I can see that it would be helpful to have a next level of detail around the audit. I think it will highlight companies who choose to run to slightly higher risk than the norm as this will be where the Auditor and Audit Committee opinions might vary. The readers of the reports will need to become more sophisticated in how they interpret the overall reports.....That education gap represents the risk to any company of doing this.

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17. Readers want to know whether they can rely on corporate information, and a reliable set of accounts is a good start. Reliable information about the balance of benefits and risks for an organisation together with the uncertainties in reporting help users make informed decisions and influence the executive of the company for the better.

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16. In the spirit of ensuring that the companies demonstrate their commitment to good governance, the findings should be reported but this should not be in detail but maybe via a binary approach.

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15. Would like to hear fuller debate of the various issues before concluding. The recently introduced audit report is already leading to lots of additional standard wording which doesn't add much for the reader (e.g. reference to revenue recognition as a significant audit risk even when not seen as a significant risk for the particular company's audit). Also, it's really important to maintain open and constructive dialogue between auditors and audit committee - is there a risk that more disclosure of accounting/audit issues leads to tension over wording which actually discourages full debate in the audit committee? 

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14. I am not convinced about this. Firstly we are just going through a big change so should we not see how that settles before we layer on more change? Secondly whilst at one level more "flavour" for the investors around these issues is fine it will be sensitised and will it really tell them something new as clearly the auditor got themselves comfortable overall. Finally I worry that there are business risks out there like HSE which might not get the focus they deserve as everyone is focussed on the risks the auditor focussed on. 

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Thank you for the votes and the comments so far. As it stands we have 75% agreeing or strongly agreeing with this idea, with the comments mainly raising concerns. If I can sum up those concerns, they are, first, whether this approach is unfairly putting the onus on the company to justify its position (e.g., the auditor sees the company as just within the acceptable range); and second, the alternative company/ audit committee disclosure model. These are both about whether the shareholders should hear first or second hand from the auditor. It’s not a question for auditors but something to be mediated between companies and shareholders. So do please keep the comments and votes coming through. I am really encouraged that we’ve opened debate on an important topic.Tony Cates – Head of Audit, KPMG in the UK

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13. I believe the standards need to distinguish between PIEs and private companies. There is more value in this initiative for PIEs.

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12. Ways in which we can gain an insight of the audit process are a key component of improving confidence and trust in the value of audit.

  

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11. I would still need some persuading about yet more dialogue in the audit report. In the case of the well known now State owned Bank the annual accounts ran to over 600 pages when it collapsed; so there was no shortage of information and I wonder whether including all the auditors findings and judgement calls would really have changed the outcome? The Audit Committee have the power to dig deep with the auditors and should do so and the management letter provides much of the detail on systems weaknesses and improvements that the auditors feel need to be made. Stakeholders with real concerns could access those rather than try to interpret yet more language in the financial statements.

  

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10 .It's important to understand the auditor's findings , or we are just left wondering! But, also important not to just repeat everything in the audit committee report. Let's have it all in one place and said clearly by the company, then signed off by the auditor.

  

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9 . I suggest the Audit Committee should have the right of reply to/comment on the Auditor's findings.

  

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8. The difficulty lies, as ever, in the negative reports where the auditor either disagrees with the company's position or is in sympathy with a known problem that is being addressed but which could be commercially sensitive. This is not a reason for ducking out but highlights the intrinsic difficulty of full and frank disclosure that might pre-empt the very outcome that the company and its auditors fear. I have no solution save to say it would be a poor outcome where concerns became reality merely by their being voiced in writing.

 

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7. This is a useful debate and providing it does not become prescriptive then much will be gained. I think this is an area where the charities could gain because theirs is read by stakeholders (both donors and beneficiaries) and needs a clearer vision of the outcomes not just in terms of numbers. In passing I have a set of 1889 audited accounts where the audit opinion is just 4 words " audited and certified correct " oh how simple ....

 

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6. Shouldn’t your "findings" be in some way covered off by the Boards statement in the Annual Accounts with the Auditors affirming them?

 

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5. The new extended audit report (and audit committee report) is a good step forward. I believe it gives adequate information instead of the boiler-plate meaningless words that had developed. Giving audit findings however can lead to more questions and undermine confidence further e.g. in the case of the rehab liability ..what does "optimistic" mean-how much is that in monetary terms?;who is correct-the company, the auditors, the expert?? etc

 

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4. Including the findings in the report runs the big risk of losing focus and attention of the reader. I want to know if the auditor is OK with the results. There's a separate story about the detail that can be disclosed separately.

 

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3. I personally consider that it is the role of the auditor to provide assurance over the integrity of financial statements and that management should report on the risk areas appropriately in any financial statements. Auditors will always be cautious (rightly) in any adverse views expressed in their report and anything less that confirmation will be read as criticism. Far more valuable would be the auditor strong enough to point out inadequacy in management's disclosures regarding key risks. The benefit of the SOX process is that auditors have to assess actively the adequacy of disclosure relating to control failures within reasonable parameters. A regime could be developed to validate more widely the overall financial statement disclosures in some way but with a clear steer that management (and their boards) retain ownership and responsibility for their financial statements.

 

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2. I agree that Audit Reports should give the Auditor's findings, but the key judgements should be covered in adequate detail in the Audit Committee report, and the Auditor's Report should dovetail closely into that report, rather than repeat information. Good coverage of matters of judgement in the Audit Committee Report is more likely to engender trust in the accounts, than anything that can be done via the Audit Report.

 

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1. The examples quoted appear relatively un-contentious. It is difficult to know what would happen with something more contentious and whether greater transparency on a disputed item would help or hinder the process.

 

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Tony Cates

Tony Cates

Head of Audit

KPMG in the UK

020 7311 8791

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Video: Delivering more of the value of audit

Video: Delivering more of the value of Audit

 

Jimmy Daboo gives his personal perspective on the new audit report and his experience of going beyond the standard requirements.