Global
John Gordon

 


Relationships and third-party perceptions

Q. Can auditors ask the truly tough questions? Aren’t they simply too beholden to management?

My perspective comes from watching and talking to more than 200 working audit partners. In my experience, they believe their lot in life is to help clients get to the right answers. To do that they need relationships that are professional, but allow them to ask tough questions. Management and audit committees have front row seats, and they absolutely believe that auditors are independent.

Q. Is it fair that the audit profession has been blamed for failing to predict the financial crisis?

Financial statements are like looking in the rear view mirror of a car. It can be interesting to learn about a place you’re never going to see again. But it’s not so relevant to where you’re going. So yes, I think a lot of the criticism is understandable. The challenge is to move away from the historic focus, but without blanket protection from liability. I don’t think society is quite ready to provide that yet.

Q. If audits were not required, would we have them anyway? Do they create real value?

In Canada, there is no statutory requirement for unlisted firms to have an audit. But banks considering a loan, private equity firms and other potential investors demand them. So there are lots of very smart stakeholders who insist on audits. That shows they attach a lot of value to the product. But is some of it negative value? Maybe – the feeling is that if something goes wrong you would wish you had demanded an audit.

Q. So how much of this is about investor perceptions and the demands of capital markets?

Wholesale investors see the information auditors hold as largely irrelevant. They would like us to opine on management’s forward looking statements. But boy, that’s hard to do. Even so, I think auditors could share more of the insights we get from our access to management. In the long term, we need to focus on all the information that investors value. Companies regularly disclose lots of valuable information – like airlines’ load factors or natural resource companies’ production volumes. I believe auditors should focus on validating all this financially relevant information.

Q. How about public perceptions and the needs of the wider community?

Poor public perceptions of auditors carry a real risk – the risk of intervention in the industry. Talking more with the users of our reports is one way to address this. After all, if you’re buying a house, you would welcome the chance to talk to the surveyor. Regulators could easily gain some insight from talking more with auditors, but communicating with large groups like retail investors could be harder to manage.

Q. What about audit opinions and public reports? Should they move beyond the current pass/fail format?

The key question is whether the profession is willing to be open minded about the product of an audit. The public are skeptical about the value of binary audit reports. If we provided the kind of conclusions and explanations that investment advisers do, our reports might carry greater value. I think much more could be said, including some sort of judgment on solvency. Auditors, with our access and expertise, must be able to do better than something which is little more personalized than a stamp.

Q. Do you have any final thoughts?

We should focus on all data that companies put out. And we should communicate better with investors, regulators and other audiences. We need to broaden our communication and our deliverables.




John is the Managing Partner of Audit in Canada, having been elected to KPMG’s partnership in 1993. He is also a member of the firm’s Management and National Markets Committees and was formerly Calgary’s Office Managing Partner. With more than 30 years of experience, John provides assurance and advisory services to a broad spectrum of companies. More specifically, he works with clients on IPOs, accounting for mergers and acquisitions, changes in accounting standards and other complex accounting matters. He is a frequent speaker and lecturer for a number of institutions and associations.

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