Audit experts have their say
Could auditors provide greater assurance on the narrative, non-financial element in company reports? If so, is there a demand for it? Those were among key questions at an ICAS seminar .
The subjective nature of the data and the auditor’s skill set are the main challenges standing in the way of extending assurance to more of the narrative information in the ‘front half’ of company reports.
That was the conclusion of a straw poll at an ICAS breakfast event, hosted in London by PwC. Participants cited the nature of narrative information (38%) and the skills and capacity of the audit profession (34%) as the most important limiting factors. The legal liability regime (19%) and cost (9%) were seen as less critical.
ICAS has been at the forefront of thinking on assurance for some time, and participants heard from ICAS technical director David Wood CA about how ICAS publications such as The Future of Assurance had helped to guide thinking in the profession and among regulators.
Professor Ian Fraser CA of the University of Stirling introduced the findings of research, commissioned by ICAS, into the impact of the Financial Reporting Council’s recently introduced ‘fair, balanced and understandable’ regime for narrative reporting. He said that FBU was regarded as a good thing, but added that views amongst auditors, accounts preparers and investors differed as to whether the new requirements had changed the content of narrative reporting. Some auditors had suggested that FBU had given them more clout to challenge management when necessary.
Andrew Gray CA, Regulatory and Audit Co-ordination Manager Deutsche Bank, explained how a working group set up by ICAS had set out guidelines for boards – Towards Transparency, published in 2015 - to help determine the appropriate type of assurance obtained over individual key performance indicators (KPIs) and how this could be communicated. He said challenges included the question of costs versus benefit, determining the correct level of assurance on KPIs and meeting users’ expectations.
The seminar, chaired by ICAS President Jim Pettigrew CA, also included a panel discussion with: Ian Fraser; Gilly Lord, Head of Regulatory Affairs, PwC; Marek Grabowski, Director of Audit Policy, Financial Reporting Council and a member of the International Auditing and Assurance Standards Board; Iain Richards, Head of Responsible Investment, EMEA, Columbia Threadneedle Investments; and Paul Taylor, Non-Executive Director and Business Consultant.
Gilly Lord said that PwC’s ‘Citizens’ Jury’ research indicated that the public are interested in the information companies report, and they are keen to see a wide range of information, not just financial.
She said: “There is a great opportunity now, to make big changes rather than just making a few tweaks to the existing system. It’s the right time: society is looking at corporate performance in a wider way than it ever has before, and technology gives us the chance to revolutionise corporate reporting and audit.”
Marek Grabowski said that both the IAASB and FRC are open to the idea of change in audit and assurance, and added that it was being partly driven by change in corporate reporting itself. He said: “The annual report continues to evolve. It is not yet at a state of full maturity.”
Iain Richards said that investors require:
- Confidence – in what is being done to provide assurance;
- Complementary assurance to the statutory audit;
- Communication of useful information; and
- Clarity – regarding the level of assurance being provided.
He added: “We need to be confident that we can rely on the figures in the ‘front half’ to draw conclusions about the business and its prospects.”
As a non-executive director, Paul Taylor said that “there has to be a balance” between the information provided and the level of assurance, and the cost of that provision. He said: “We have to ask, is it creating additional value?”
He added that while ‘boilerplate’ statements were of limited value, to give too much detail on the risks a company faces would give away competitive advantage.
A Q&A discussion with the panel and audience raised a number of issues, including: what is the perceived problem that extended assurance is intended to address? Also, are auditors always the right people to provide assurance on all topics – such as statements on a company’s environmental impact?
While some investors appear to welcome greater assurance in narrative reporting, the consensus was that such assurance cannot be uniform. External assurance is more feasible to apply to some areas than others, especially where reported data is historic, quantifiable and verifiable.
As Jim Pettigrew put it: “No one is suggesting blanket assurance over everything, but there are areas, such as KPIs, where assurance is important. Ultimately, we all have to get this right!”