Q. It’s being said that the quality of the audit process has not changed recently, despite the fallout from the financial crisis. What are your views on this?
There is a renewed focus on areas of judgment, which is where we are likely to see the biggest problems. Since the financial crisis, more senior and experienced personnel time is being spent on the audit, with more probing questions and discussions with companies around key assumptions and about where the business is going. Our training is better focused on how professional skepticism is demonstrated in the questions auditors ask and in the thinking they apply to a problem.
Q. How can you quantify the commercial value of the audit – both to the company being audited and to the wider capital market?
What would happen if there were not an audit? The audit plays an important part in giving people comfort and there is massive commercial value in that. If companies didn’t have somebody independent saying this company’s historical financial condition is what it says it is, then the level of trust around the business community would be much lower than it is.
Q. How can audit quality be ensured in an environment where delivery costs are rising but prices falling?
A quality process is one that can focus on the right things and which can be repeated. If you go from country to country and partner to partner, there are differences in how audits are executed. There is real scope for doing audits better by getting increased consistency around the thinking and judgments in how you do the audit. This should get rid of inefficiencies, cut costs and improve quality.
Q. What would auditors do differently if unconstrained by regulation and able to deliver solely what the capital markets want?
In my experience, capital markets are more interested in cash flows than anything else. They are also more interested in the forward-looking than in the backward-looking figures, so assurance work over projections might be appropriate. Can we verify the information the company is putting into the market about its prospects? I’m not sure our current regulatory structures make it easy to do that without creating another set of legal issues for everybody. But we should beware: it’s dangerous for anyone to assume that the auditors should be reporting on how well the company is being run. That’s asking too much.
Q. Of all the parties that have an interest in an audit, which do you think feels most short-changed by the value it provides, and why? Are their concerns justified, and how can they be addressed?
I think institutional investors understand that the world would be a very different place without an audit. They understand that if things go wrong it is not the auditor making decisions around business activities. Retail shareholders don’t understand that. They don’t read audit reports or understand what an audit is. The question with retail shareholders is: do they actually care? I don’t think they do until something goes wrong. If they don’t care, then it’s hard to improve engagement with them.
Duncan is the National Managing Partner of Audit in Australia and Head of Audit for Asia Pacific Region. Prior to this appointment, he was Partner-in-Charge of Sydney Corporate Audit. He has over 26 years experience with KPMG, including 15 years as a Partner. Duncan has extensive experience with an understanding of clients in the consumer markets, industrial markets and transport sectors.