So what do investors really think about the audit and assurance?
Published on 17 September 2012 0 comments
It is rare for me to read the findings from a global survey from cover to cover. But when the investment community speaks about the value of audit and assurance, I listen.
PwC published on 10 September ‘Assurance today and tomorrow’. Based on over 100 interviews with senior investment professionals from 11 capital markets, this report is compelling reading for anyone interested in the effectiveness of the governance structure underpinning the information reported to shareholders. The candour and insight offered by those who participated in this study present the audit profession with some clear messages.
Firstly, although the investment community takes comfort from knowing that financial information has been through the audit process, the investors and analysts we talked to said they would like the audit to evolve so that it remains reliable, relevant and valued in the future.
This came as no real surprise to me. In fact, we have been working hard behind the scenes for some time to identify opportunities to better meet shareholder needs.
However, what did strike me when reading this report was the degree to which this desire for greater transparency is balanced by a focus on the practical. A number of those we spoke to asked how in practice auditors can provide insight without added information simply becoming boilerplate statements. There is no appetite for boilerplate statements that ostensibly tick a particular disclosure box. Similarly, questions were raised about the unintended consequences that might arise from transparency into the internal debates between auditor, audit committee and management. Would such conversations become less frank if elements of that discussion were subject to public report?
It was also striking to know that respondents to the survey don’t see the audit in isolation; it is part of the overall system of governance. So when thinking about enhancing disclosure, they are not focusing solely on the audit report. For example, investors were generally satisfied with how going concern matters are addressed in auditor’s reports today, but they are clamouring for more transparency from management around covenants.
Hazy understanding of audit committees
In a similar vein, a second key message that rather astounded me when reading this survey was how few of those we interviewed had ever met with any audit committee members. A large number confessed that they had but a hazy understanding of the function that audit committee members perform. As audit committees act as champions of shareholder interests, finding a mechanism to allow investors to understand better the effectiveness of their work is a clear conclusion of this study.
Measures that move markets
Finally, a message from this report that is dear to my heart. We heard from many participants that measures that move markets should, in general, be subject to some form of independent assurance - often non-financials – for example subscriber numbers. I can understand this. If I were committing capital to a company, I would say exactly the same. So I strongly encourage all management to consider the information they report that is price sensitive. Is it reliable? Is it consistent over time? In this world of constant challenge and scrutiny, I would suggest that this is a message from the investment community that CEOs and CFOs cannot afford to ignore.
The challenges set out for the audit profession in this report will not be resolved over night. Nor can the profession make progress alone. If we want an assurance and reporting model that is fit for the 21st century, analysts and investors along with management and other stakeholders will need to be engaged in the debate.
So while we digest the findings and decide on our next steps over the coming months, I would encourage you to do the same and to share with us any further thoughts and ideas that you might have.
As always, do please keep in touch – I really value your responses to this blog.