Practical perspectives on reporting #5: An auditor’s view: A Christmas Carol, Being a Tale of The True Meaning of Audit
By Tamara O’Brien, TMIL’s roving reporter
Scene one
Claire Bodanis: So we’re here today to discuss audit – but may I first slip in some rather splendid feedback we’ve had from an Assistant Company Secretary, who said: ‘Your book Trust me, I’m listed has given me a real enthusiasm for our ARA. It's fantastic and I'm hoping it will have a positive impact on our reporting.’
[Cheers, applause, approving murmurs.]
Now, we’re all excited by the Brydon Review, with its proposal that audit’s purpose is ‘to help establish and maintain deserved confidence in a company’ – in part by acting in the interests of stakeholders and society in general, not just shareholders. And that auditors should be critical thinkers in that process, not bean counters. What say you, Maria?
Maria Kepa: As one of the few on this planet who has to read the increasingly elephantine annual report from start to finish, I say bring it on! We need more clarity about what audit does and doesn’t do. Though I do like the UK’s non-prescriptive approach, which lets companies work out how best to report their story and context, within parameters.
Paul Lee: From an investor point of view, audit is vital – an independent check on corporate reporting. Rather than assisting companies, auditors need to be at arm’s length from their clients. And on the subject of who actually is the client –
[Paul is interrupted by clanking and ghostly moaning. It’s the Ghost of Audit Past, in a slightly too big suit, pulling a trolley laden with dusty tomes]
Maria: This is exactly what I’m talking about. Look at this pile of legislation. The disclosure checklist alone is 150 pages! And that’s just the legal requirements; nothing to do with quality of reporting.
Ghost of Audit Past (nervously): Hey, I’m just on my audit rotation. I’ll pass your concerns on to my Lead. [Vanishes]
Paul: As I was saying – who is the auditor’s client? It’s easy to fall into the trap of thinking the company is the client, because the relationship is mediated by them, especially the finance team. But in reality the client is the shareholders. They appoint the auditors, they’re the ones the audit is accountable to. But investors often don’t pay enough attention to audit, nor to the audit committee [who act independently to ensure that shareholders’ interests are protected]. I’d also welcome better reporting in the auditors’ own report within the AR, it can be very formulaic.
Scene two
Claire Bodanis: So, what reforms are you both particularly looking forward to?
Paul: I was involved in the Brydon Review – though Sir Donald did all the work! One of the crucial ideas that I think will drive change is inviting shareholders to comment on the directors’ risk report and the auditor’s plan, before the scope of the next audit is finalised. Auditors don’t have to act on these comments but if not, they have to explain why. I think this will improve audit, link it to risk, and enhance shareholder engagement.
[Suddenly all three wince and cover their ears, as Noddy Holder blasts out It’s Christmaaaaaaas. The Ghost of Audit Present has whisked our trio off to a semi-deserted shopping centre.]
Ghost of Audit Present: Well, here we are. In the middle of the worst health, social and financial crisis for generations. It’s all to play for. Don’t muck it up folks. Cheerio!
[Vanishes – and back we go to Dickensian London.]
Claire: Yikes, that almost makes me glad to be back in this dank cellar. Though it’s hardly my first choice of meeting venue. You can tell it was some gnarly old writer and not Fi who arranged this. Anyway, where were we?
Maria: On the subject of audit reform – I just like the fact my profession’s being talked about! Audit is vital to the function of capital markets. Our role is to check the quality of a company’s financials, and ensure there are no inconsistencies between the figures and what they say in their narrative, in order to bring about that ‘deserved confidence’.
We’re here to challenge and of necessity that creates tension, but auditors and companies both have the same objective – to put accurate information out into the marketplace.
Scene three
Claire: ESG framework standards abound! Thoughts?
Paul: The virus has reminded us that business sits in society – there’s no hard divide between companies and life all around us. But too often companies put ESG in the front-end narrative of the AR and not the audited financials in the back end. The whole point is that ESG is material to the business, and companies need to show how their principles and financial metrics are linked. If it’s material, it can affect the financials.
Maria: Yes, assurance of ESG information needs to be seriously considered. And I’m not saying that because I want more work – this could be carried out by a different assurance provider.
Claire: Maria, the ICAEW’s (Institute of Chartered Accountants in England and Wales) manifesto for building a modern audit profession – will it happen?
Maria: It’s happening! There’s so much experimentation with new techniques like machine learning, which can map transactions to see if they’re fraudulent.
[Bathed in a silvery mist of assurance, almost halo-like, The Ghost of Christmas Yet to Come appears, in the form of Father Christmas. He’s carrying a sack. Our panellists peer into it, and pull out three gifts labelled Quality, Honesty and Transparency.]
Claire: Oh joy. The future of audit is assured. Now, Father Christmas, #WTFW’s my real pressie?!
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To all readers of this blog, thank you for coming with us thus far, and we look forward to seeing you again in January. Meanwhile, Merry Christmas, a much happier New Year – and God bless us, every one.