Audit reports: on board for fairness
Named audit reports will work if there is an equitable approach
Named audit reports will work if there is an equitable approach
The Professional Oversight Board’s proposals to publish inspection reports on
named firms is a sound one, which will give audit committees and investors more
of the information they need to make informed choices about their auditor – but
the process must be handled properly if it is to be constructive.
Provided that a balanced picture is given, the new model proposed by the POB
should underline the quality of the work being carried out in this country. If
it is equitably managed, it should help the audit quality message to come
through.
If there are any failings, it will certainly focus the mind and attention of
the firm in question to get the problem fixed. That has to be good for market
confidence.
But already there is an important caveat. What do I mean by ‘handled
properly’ and ‘equitably managed’?
First, the reports need to tell the whole truth and do justice to the full,
overall picture of the audit work that has been carried out – not just focus on
any negatives. It is just as important to focus on what has been done well, as
what has not been done as well. Otherwise, there is a real danger of a distorted
and unduly negative message being reported, in the media and elsewhere.
A rounded view is key to ensure that stakeholders better understand the
contribution of audit, and so help underpin confidence in financial reporting.
Secondly, the reports should be published simultaneously, on as many firms as
possible. Otherwise (as has happened in the US), there is far more interest in
the first report to be published than the last, and it effectively becomes an
uneven playing field.
Thirdly, audit firms should have the opportunity to see a draft of the
report, so they can give any material comments, and also have some notice that
the report is due to be published.
Finally, the reports should not specify which individual audits they are
referring to.
Subject to these (commonsense) conditions, KPMG supports the POB’s proposals.
KPMG was the first firm to produce plc-style annual reports 12 years ago, and we
welcome moves to increase openness and accountability.
If we are serious about audit quality, then we need quality controls. As long
as the controls are fair, we have no problem with that.
Richard Bennison is head of audit at KPMG