The recent post on reporting about key audit matters caused me to start reflecting on the value of audit more broadly…
In that earlier post, I quoted a Swiss Deloitte publication as follows: “A more relevant report may improve the user’s interest in the auditor’s report and their understanding of the audit, adding to the credibility and value of the audit.” That term “value of the audit” has been batted around a lot over the years – for an institution that’s so deeply established and defined and that extracts such massive amounts of money from the corporate sphere, it might seem peculiar that commentators often struggle to articulate what that value actually is (on the other hand, it might not, considering comparable difficulties in agreeing on the value of everything from government to technology to life itself).
A few years ago, the UK Economia magazine and KPMG held a series of roundtables on this point. Some of what came out of that exercise is almost classically hollow and meaningless:
- “The FRC’s mission is to encourage high-quality corporate reporting and corporate governance, to foster investment. Obviously, the annual report and accounts is key. But we also believe that audit is a fundamental underpin of that model, and therefore is fundamental to capital markets. Our role is to make sure there’s justifiable confidence in audit.”
The following comment, from the chief audit officer at Aviva, provides rather more stimulation:
- “The value of audit isn’t to be measured by the beauty and elegance of the financial statements that are produced,” he said. “It’s the unseen difference between the financial statements that are produced, and what would otherwise be produced without audit, due to a combination of simple errors and over-optimism in the absence of effective challenge, and in some cases, manipulation. That difference between what you see and what you would have seen otherwise, is important.”
The implication there might be that audit is primarily a defensive or prophylactic exercise, inherently destined to be under-appreciated, because those involved in vigilant prevention never get as much credit as those who ride in to save the day after trouble has already flared. But you might wonder, among other things: if the combination of internal control, corporate governance, internal audit, securities laws and so forth isn’t already sufficient to reduce the likelihood of material misstatements arising from “simple errors” to a very low incidence, then why would the cumbersome mechanism of audit do any better?
Other commentators attempt to set out the opposing case, that audit adds positive value to business. Take this example from the Australia/New Zealand firm Pitcher Partners:
- So, perhaps it is time to reconsider how we describe an audit? Imagine the positive outcomes if we were to stop underselling an audit as a compliance burden and think of it as a key partner in the ongoing success of a business from start to finish, allowing owners and management to focus on what they do best?
- Planning to acquire a new business or enter a new relationship, locally or overseas? Consider how the audited financial statements can facilitate the building of a relationship based on a sound financial footing with both parties knowing the substance of the other.
- Planning to access more funding or to change their funding agreements or provider? Consider how with audited financial statements, their business can illustrate its value and financial strength…
Again, a problem with such illustrations is that one could perhaps achieve those goals without all the specific baggage that comes with an audit (expensive fine-tuning of the numbers in the more esoteric note disclosures, and suchlike). Some might doubt whether the desire to be a “key partner” in a business’s ongoing success is entirely consistent with the notion of an independent audit, carried out with limited susceptibility to influence from management. But then, the fact of the auditor being engaged and paid by the company (albeit perhaps through the intervening body of the audit committee, depending on the jurisdiction) isn’t entirely consistent with that notion either.
Of course, the audit requirement is entrenched across the developed world, so we lack the comparative data that might flow if (say) an Australia or a Canada were to lift all mandatory audit requirements for an experimental five-year period. In its absence, the debate about audit often feels like dealing with a taxi driver who’s trying to distract you from the ripped upholstery by turning up the music. There’s something inherently neurotic about the institution of the audit, partly evidenced in how it spawns endless layers of review and oversight – within the audit firm itself, up to technical partners and other concurring partners; then by audit oversight bodies such as the Canadian CPAB…which in turn has its own council of governors, which carries out an annual assessment of CPAB’s effectiveness and provides it to the OSC among others, within which it’s presumably scrutinized at various layers, etc. etc. Of course, oversight is worthy and good, but even after all these years, it very often seems that audit loses itself in oversight, never quite figuring out how to facilitate actual sight…
Well, we’ll return to this in the future I expect…
The opinions expressed are solely those of the author