Q. Has the quality of the audit improved since the 2007 financial crisis? If so, have stronger regulatory oversight and standards driven the improvement, or has the profession done so?
I agree that the quality of audit has improved since 2007. As a profession we’ve reflected and learned from the crisis. Commitment to quality excellence is an imperative because without this there will be no trust and no profession. Although audit quality didn’t contribute to the crisis, it has become clear that the outside world expects the audit profession to give early warnings of what’s happening in the system. One of the criticisms we hear is that the profession was the watchdog that did not bark. The world expects more from us in terms of communication, both about our findings in individual audits and early warnings of what’s happening in the system as a whole. So, in my view, better and more communication about what matters to our stakeholders is the way in which we can improve our relevance and restore trust, and that’s what we are committed to do.
Q. Do auditors have the capability to give anything more than a binary pass or fail audit opinion? Is the profession sufficiently sophisticated to deliver a more narrative-based opinion?
I think we already do more than give a pass/fail. If you look at the views and insights we provide to audit committees about internal controls, risks and IT systems, we’re doing more. We also indicate where we think they’re on the aggressive side or conservative side in their accounting. But we don’t say any of that to the readers of our reports, who are principally the shareholders. So I don’t think we lack the sophistication to do more and we can comment on our findings and views during the audit. I think the challenge for us will be to make sure we say things that add value, rather than falling back to boiler-plate language.
Q. Does the common compliance-based training that auditors around the world receive encourage them to take a ‘tick-the-box’ approach, rather than the more inquisitorial approach that is required?
I think we should not short change our people, because auditors have to have all-round skills. Nonetheless, there’s a perception that we have too much of a compliance mindset. For example, International Financial Reporting Standards have become more complex over time and people say we focus purely on the complexities of the standards. Similarly, we have introduced electronic tools to aid the audit – and there’s a risk that they become an end in themselves. But I would say that our people are more all round than they’re given credit for.
Q. What meaningful improvements or innovations in the audit has the profession made recently? What is the most meaningful improvement or innovation?
I think we have been lacking in innovation and that’s why we’re reviewing what the audit of the future should look like. How should we make more use of data analytics? How can we assess risk to identify the next crisis? And how should we expand our role beyond the financial statement, if that’s where market demand will take us? I would hope we will see innovation now because otherwise the profession will be left behind.
Q. What is the single largest weakness remaining in the audit (or the profession) and what could be done to rectify it?
The biggest weakness of the profession in my view is that we’re not communicating as well as we should do. We don’t show the outside world how much we add value. We have insights and knowledge, but we are not brave enough to share them with the outside world.
Q. Is there merit in extending the audit beyond the financial statements or even the annual report? If so, what would you suggest? Who wants this? Who will pay for it?
I think there’s a growing consensus that the current financial reporting model has led to a narrow focus on compliance and not enough on broad communication. So part of the answer is to look at the reporting model. For example, looking at integrated reporting and how companies make money for the longer term in a sustainable way, what their key performance indicators are. That is my vision. If we do that I would say that it’s natural for the auditor to provide assurance on some of the information outside the financial statements, like risk management or the key performance indicators. I believe demand for assurance should develop because people believe that it really adds value. If we don’t change it’s a question of whether we will be relevant in ten years time.
Mark is KPMG's Global IFRS Network Leader and Chair of the Corporate Reporting Policy Group of the European Federation of Accountants. He set up and led the KPMG International Financial Reporting Group, KPMG's London-based global centre of excellence on IFRS from 1997 to 2006, during the time that IFRS was first implemented by thousands of companies in the EU and in countries such as Australia and South Africa. In 1993 to 1995, Mark was on a secondment at the European Commission, where he worked in the policy unit dealing with accounting and auditing regulatory issues.