Q. Can auditors ask the truly tough questions? Aren’t they simply too beholden to management?
I think there is a tension between the need for a critical perspective and for positive relationships. We should not shy away from this difficulty. A lot depends on the audit committee or supervisory board; if it is as independent as it should be, the tension goes away. In reality this is not always the case. But a lot of regulatory and professional safeguards have been built up over the last 10 to 20 years.
Q. If audits were not required, would we have them anyway? Do they create real value?
The value of an audit is something that never gets talked about. The profession should take the blame for this. We are always on the defensive. An audit helps to identify icebergs – potential hazards that otherwise wouldn’t be seen. And who would buy an unaudited company? The world may be changing, but audits are still needed, not least because of their preventative role. But the changing world also means that the audit profession needs to develop existing and new services that clients want and require.
Q. In that case, how can the profession enhance the value of the audit?
I think we should concede that an expectation gap has developed, particularly over fraud and going concern. A lot of people believe that an auditor’s signature means that no fraud has taken place. This is not possible. But if society expects us to do more on fraud, I’m sure we could find a way to say more without issuing a guarantee. And on the going concern side, I agree that we need to become more future-oriented in our work.
Q. So how much of this is about investor perceptions and the demands of capital markets?
I’m not sure that asking what professional investors want will lead us down the right road. For example, auditors can’t discuss alternative accounting treatments – as I often hear investors ask. But we could certainly make our work less backward looking. If clients want us to we could analyze risks, budgets and business plans and discuss them with audit committees. But this is difficult to imagine in today’s litigious environment. We also need to think about how this could be communicated to the public.
Q. How about public perceptions and the needs of the wider community?
I agree there should be a wider debate over the availability of auditors to shareholders and analysts. Perhaps all auditors should be required to take questions at an AGM, as they already are in the US and the Netherlands. However, a fair number of issues would need to be resolved, especially confidentiality and other legal questions that differ from country to country.
Q. What about audit opinions and public reports? Should they move beyond the current pass/fail format?
There is no doubt in my mind that we as auditors should communicate more. The way we currently issue pass/fail opinions is certainly not sufficient. one thing we could do is to talk more about critical areas of the audit – if it could be done without giving away too much commercially sensitive information.
Q. Do you have any final thoughts?
At the end of the day, we need to be clear that auditors are running a business. We can’t rely on regulation or legal requirements to sustain us. If the profession doesn’t evolve, it risks repeating the fate of other industries that failed to realize the world had changed.
Joachim joined KPMG in 1989 and has served in a number of key leadership positions, including Head of Audit for the EMA Region from 2005 to 2010 and Global Head of Audit from 2010 to 2013. Joachim has published several articles, mainly in accounting and auditing professional journals. In addition to the German professional audit qualification, he is a UK Chartered Accountant having spent three years in London from 1992 to 1995.