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?
The financial crisis had less impact on Japanese financial institutions than on their European or American counterparts. But audit scandals had a very big impact on the audit practices of all Japanese audit firms. Our regulators have developed a new auditing standard requiring serious skepticism and more audit procedures focusing more on the possibilities of detecting fraud or mistakes in the preparation of the financial statements.
Q. How can you quantify the commercial value of the audit – both to the company being audited and to the wider capital market?
A clean audit opinion means the company should have at least fair or reasonable standards of corporate governance, management control and internal controls. If a company cannot be audited, or receive a clean opinion, this will have an effect on stakeholder’s perception of that company. From that point of view, I would estimate that a company with a clean audit opinion should be valued significantly more than one without.
Q. What would auditors do differently if unconstrained by regulation and able to deliver solely what the capital markets want?
During our audit we recognize several risk areas and we focus on these in our procedures. I think the stock market would appreciate it if we were to prepare a longer report in which we explain risk areas which came to our attention during the audit. This is not yet being discussed in Japan but I think that if different reporting around the audit which is being discussed elsewhere, such as in the US or in Europe, is brought in, then our regulators will consider implementing it.
Hideki is Head of Audit and Deputy Managing Partner at KPMG AZSA LLC, Japan. He is also a member of the Global Audit Steering Group, the Global IFRS Advisory Services Group and has extensive experience working with multinational Japanese companies.