Assurance confronts its barriers

IN THE WAKE of the financial crisis, the time is ripe for firms to expand their services. The recriminations are by no means over, but firms are beginning to position themselves as central to business expansion, rather than tail-between-their-legs apologists.

But how do they create a portfolio of new services? What will it look like, and more importantly, is there demand?

Much attention is being focused on forward-looking assurance and risk reporting. This could take a number of forms, but essentially, would be designed to help investors make judgements on a company’s future, rather than being left to extrapolate from the frozen snapshot of audit reports.

The Big Four are reportedly seeing demand for such services from a number of quarters. KPMG said its risk and compliance department is one of its fastest-growing arms, and many firms insist they have more to offer than a tick-box service and boilerplate audit reports.

Mid-tier players also see value-added services as important, potentially opening the door to the FTSE 100 audit market. Richard Bint, senior partner at PKF, revealed the development of such services “has been considered”, and said they would be provided outside the statutory audit, yet using much of the same information.

The form these services would take is another stumbling block for firms. While Bint said they would certainly come as a standalone facility, others are not so sure. Audit is currently the most in-depth examination of a company’s financial status, and an extension of its scope might seem like a natural move for a data-hungry market.

Steve Maslin, head of external professional affairs at Grant Thornton, said noises from the Financial Reporting Council, the EU, and even the US Treasury, mean there exists “a real opportunity for step change in corporate reporting”. He insisted that “investors are hungry for information”, and tools to help them assess the quality of company data are in high demand.

However, extending financial reporting would be impossible without enhanced disclosure from company directors, and this is a sticky area that touches on professional and personal liability.

If directors are to optimise the information they provide – for example, by setting out potential future risks to the business – they would need a safe harbour to prevent career-shattering litigation in the event of a legal challenge. The same goes for auditors who are required to report on the data; without this firewall, Maslin warned investors will find themselves with “more words and less sense”.

For example, without limited liability, a director disclosing four potential threats could be sued when an undisclosed fifth threat derails the company two years later; such a risk would deter any sensible leader from speaking up.

Audit is the only field in which liability is unlimited, meaning disclosure within this remit would be unpopular with companies and auditors alike for the litigation risks it poses.

However, crowbarring such obligations into the statutory audit might be the only way to guarantee compliance; without a legal requirement, companies will probably keep schtum. Pauline Wallace, head of policy at PwC, said the necessary change to the Companies Act is unlikely to come from a government obsessed with cutting regulation and red tape. If a legislative change were made, unlimited liability would have to be reviewed, as it is “inappropriate” to be held to the same rules when reporting on anticipation rather than fact.

If a forward-looking component is not added to statutory audit, what then? It will be up to companies to decide whether they want to disclose or offer future assurance, and none has been forthcoming thus far. If companies are hesitant, this implies they perceive no commercial benefits at the current time.

Although investors have said they want greater disclosure – using forums like the EU green paper and Ipsos Mori survey to publicise their views – companies have paid scant attention. This suggests a lack of serious pressure for change in corporate reporting, with forward-looking assurance still viewed in a negative light.

One option for bringing more force to bear on the issue would be a collective move by investors to insist on greater disclosure. However, Investment Management Association director of corporate governance and reporting Liz Murrall said this is unlikely. Such a group would be wary of takeover rules, and of being seen as trying to exert too much influence on a company; the perception could damage their interests and, in a worst case scenario, lead to them being barred from certain investments.

Without a mandatory move through the Companies Act, or regulatory change from the FRC, it seems directors will be slow to proffer detailed forward-looking data. Until the markets respond favourably to such disclosure, there is scant chance of companies lining up to provide it. There are efforts being made to improve corporate reporting and render it more valuable to the end user; the FRC recently published its Cutting Clutter report, and there are consultations on narrative reporting planned for later this year. However, the cultural change required to generate widespread demand for anticipative reporting will be slow in coming, and no company looks ready to make a break from the pack.

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