Q. Can auditors ask the truly tough questions? Aren’t they simply too beholden to management?
I don’t see independence as today’s most pressing issue. Does independence still need to be monitored, and if possible improved? Absolutely. And safeguards continue to be strengthened. But to me this is a bit of a red herring. It should not be the profession’s greatest priority.
Q. Is it fair that the audit profession has been blamed for failing to predict the financial crisis?
It is unfair to blame auditors for failing to prevent the financial crisis. But I think we deserve to be criticized in other areas. One is that we have not challenged the view that we should only talk about historic information. Another is that we don’t use fully the vast amount of information we gather in the audit. Auditors are capable of communicating much more information than simply an audit opinion over historic financial data -- we know a lot about the companies we audit and can use this information to help other stakeholders fulfil their roles.
Q. If audits were not required, would we have them anyway? Do they create real value?
If audits did not already exist, we would certainly need to invent them. Management, shareholders, banks and capital market participants would want them. But would we invent the audit product in its current form? I doubt it. We would report not just on results but also on risks, not just on numbers but also on narratives, not just once a year but continuously. The output would change, and as a result so would the process.
Q. In that case, how can the profession enhance the value of the audit?
I don’t think we can add much value just by changing how we audit. We need to focus on what we audit. Some of my clients issue so many reports that I can hardly keep track, and they would like to see them all audited. But again and again I see firms running away from assignments because they don’t have cover from a specific auditing standard. It is up to us as a profession to adapt. We need to maximize the potential value we can provide to our clients.
Q. So how much of this is about investor perceptions and the demands of capital markets?
I look at the financial information that capital markets need, and I see very little overlap with what we audit. If an audit is useful, why is it only useful every fourth quarter? Ideally, auditors would be able to state that all financial information is accurate. Doing this in real time is probably impossible. But the first step could be to retrospectively check all financial information released to the markets. People have traded on this data – was it accurate? That would put more scrutiny on how data is compiled and released. And over time the process would become quicker and quicker.
Q. What about audit opinions and public reports? Should they move beyond the current pass/fail format?
There is a place for pass/fail opinions, but they don’t meet all needs. For investment professionals, they are a useful sign that the numbers have been validated. But if we expand the information that we audit, we will also need to expand the range of reports we provide. This means we need to get past a US-based view of legal risks that is counter-productive in many markets. The profession needs to recognize that we are living in a changing, multi-polar world.
Q. Do you have any final thoughts?
We need to stand up and be willing to try to meet clients’ needs in the ways they want, as unrestricted by legal risks or auditing standards as possible.
Sai Choy joined KPMG in 1984. He is the Regional Chairman-elect of KPMG in Asia Pacific, the Managing Partner of KPMG in Singapore, and a member of KPMG's Global Board. He sits on KPMG's steering committee that responds to current audit reform measures being developed in Europe. Past leadership appointments include the head of audit role for KPMG Asia Pacific Region and the head of corporate finance role in Singapore.