INVESTORS HAVE QUESTIONED audit committees' independence from company management and called auditors to review the ‘aggressiveness' of companies' financial statements in a report published by PwC.
In PwC's Assurance today and tomorrow report, which interviewed 104 investors and analysts worldwide, only 26% felt that audit committees were sufficiently independent of management, compared to 39% that did not.
Participants in the survey also raised concerns that key numbers reported by company management – such as adjusted earnings and industry-specific numbers like same store sales and revenues per unit – are not required to be reviewed by auditors.
More than half of those surveyed said preliminary statements should be audited, while there were also calls for more information on how ‘aggressive' management has been with the way judgement and accounting policies are applied in their financial statements.
"It would be very helpful to know where people push the boundaries. If all companies could be ranked in terms of aggressiveness or conservative accounting policies, as judged by their auditors, that would be helpful information," said one respondent.
However, some warned that imposing new assurance standards – which would have to be drawn up to cater for the increased requirements – shouldn't have the unwanted effect of companies making fewer disclosures in their accounts.
Richard Sexton, deputy global assurance leader at PwC, said: "It is clear that investors have strong views about the future direction of reporting. We ignore those views at our peril, but they need to be put alongside other stakeholders' positions to see what is possible.
"Any solution will need to balance carefully the standardisation that rules create with the flexibility that companies need in order to express themselves."
I recently had a conversation with a fund manager who had no idea how his (small) investee companies manage risk. I was gobsmacked, but perhaps shouldn’t have been surprised given the short term-ism of the City.
Unfortunately the City puts pressure on companies to perform in the short term and as a result some directors may more inclined to “manage” their results than they might be if there was a longer term view.
In the circumstances it seems a bit rich for investors to expect auditors to put their heads on the block and make subjective judgements.
While my conversation with the fund manager was only a sample of one; it does make me wonder whether investors should be doing more to encourage their investee companies to embed risk management (which enhances long term performance) into their organisations.
If there is a focus on risk (part of which relates to reputation & therefore ethics) & the long term by investors - then the objectives of management will be more aligned with theirs and therefore the question of audit committee independence should be less of a problem.
Posted by: David Lewis, 13 Sep 2012 | 13:41
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