Audit committees don't understand their annual reports

by Rachael Singh

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30 Jan 2013

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RESEARCH HAS SHOWN many audit committees don't understand their annual reports, fail to carry out an annual evaluation of their auditor, and believe their company's risk programme needs substantial work, according to a KPMG survey

The research shows that just 62% believe their annual reports paints an understandable picture of the business, with UK respondents even less confident as just 56% believe this to be the case.

Only a fifth of UK audit committees are completely satisfied with the quality of information they receive from their company and a quarter said their understanding of underlying management's accounting judgements could be deeper.

Timothy Copnell, chairman of KPMG's UK Audit Committee Institute, said: "Audit effectiveness and understanding the assumptions underlying the material accounting judgements and estimates should be fundamental to both the board and the audit committee, and certainly to the interests of shareholders.

"So why are they in danger of slipping under the net? One would hope issues like this are being identified through the board and audit committee's own effectiveness evaluation processes and appropriately addressed."

Other highlights from the research show that 76% of global respondents do not believe mandatory auditor rotation will improve audit quality, with that figure higher for the UK (80%) and lower for Europe (73%).

The sentiment was much the same for audit retendering, with 61% globally believing this would not improve audit quality – the UK had slightly more faith with 58% and Europe 52%.

However, it was not all lack of confidence in the system. 84% of global respondents were satisfied with their external audit (86% in the UK).

Unfortunately, audit committees in the UK are still failing to see the importance of corporate social responsibility issues, with a third (34%) not discussing sustainability issues at all and 42% doing so only "periodically".

The audit committees believe that risk management programmes need to be more dynamic to move with the changing world and nearly half (45%) said their company's risk programme requires substantial work (39% of UK respondents).

KPMG conducted a survey of about 1,800 audit committees from 21 countries between August and October 2012.

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