Q. Can auditors ask the truly tough questions? Aren’t they simply too beholden to management?
I completely agree that auditing is a people profession. So standards will never be completely uniform. Independence has been high on our agenda for years, but we have failed to engage in the public debate. As a result in the Netherlands we now have mandatory auditor rotation. Rotation certainly brings a fresh perspective, but I’m not sure it actually improves independence or audit quality.
Q. Is it fair that the audit profession has been blamed for failing to predict the financial crisis?
If auditors had the ability to predict financial markets, then we would not be auditors at all – we would be making a fortune as investors! Still, I think that most of the criticism the profession has received is an understandable reaction to our failures of communication. There are a number of expectation gaps that we need to bridge in order to rebuild our reputation.
Q. In that case, how can the profession enhance the value of the audit?
It is not enough to say that we should communicate better. We must communicate better. But in the long run, we need to be more innovative and increase the quality of our audit services. This is not only the best way to create value for our clients. It will also allow us to address fee pressure and ensure the long term future of the profession.
Q. So how much of this is about investor perceptions and the demands of capital markets?
In the Netherlands we are working with shareholder groups to understand their needs. We have already taken a small but significant step by talking about our role as auditors at annual meetings. But the real goal should be to move beyond our traditional focus on the financial statements. This means auditing other statements and metrics that our clients publish, and perhaps doing more work on sustainability. It might also involve auditing soft controls, such as the influence of individuals or organizational culture. But for now that remains something for the future.
Q. How about public perceptions and the needs of the wider community?
Public communication is vital. As well as saying more about our own work, we would like to discuss management statements and board reports at shareholders meetings. But as a profession we have to balance the needs of external stakeholders with our duty of client confidentiality. So these improvements will only be achieved with the consent and support of management and supervisory boards.
Q. What about audit opinions and public reports? Should they move beyond the current pass/fail format?
In my view, introducing extended audit opinions that say more about going concern, materiality and risk assessment is one of the most important steps the profession needs to take. There is no question that this is a difficult road to go down. The more that we disclose, the more likely we are to trigger claims and legal proceedings. But taking an entirely legalistic approach is not an option.
Q. Do you have any final thoughts?
Greater openness – in a range of areas is the single most important improvement the profession can make. But openness is not the whole story. In the long term, we need to up-scale our abilities.
Marc is Head of Audit for KPMG in the Netherlands and is also a member of their Board of Management. In 2001, Marc was made a Partner and has previously held positions including Chairman of the Omega Supervisory Board, Head of Financial Services Audit and COO Financial Services Audit.