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Audit and assurance: understanding investment professionals’ needs today and tomorrow.

Audit today and tomorrow

2 Audit today and tomorrow

Contents

Overview 04Audit today 08 More value from existing audit 14Assurance tomorrow 18

3Audit and assurance: understanding investment professionals’ needs today and tomorrow

Foreword: the challenges aheadThe financial crisis has fundamentally shifted the way that the world views the capital markets system. As participants in that system, auditors have a critical role to play. We need to do more to acknowledge that shift. We also need to respond to the challenges it presents in order to help shape and define the future role of audit and assurance.

In our experience, investment professionals are very active in debates around financial reporting, and we can already see this having a major impact. Since audit is critical to market confidence in financial reporting, investors’ input in the current debate on audit is vitally important. Therefore, we decided to ask both mainstream investment professionals and corporate governance specialists for their views on how well audit currently serves their needs and how it might evolve in the future.

Change is a long-haul project, and our ultimate aim is to work for comprehensive reform in the corporate reporting environment. Reporting drives demand for assurance, and currently the auditor reports at a single point in time on just one element, albeit an important one, of the wide-ranging total information package that companies publish. This model bears further consideration, but longer- term aspirations should not deter us from taking a lead in looking at what might be possible in the short term to crystallise genuine improvements.

I am delighted that investors derive a high level of value from the fact that an audit has been undertaken, according

to the findings of our survey; but it is disappointing that a number read neither the audit report nor the audit committee report. I understand the frustration that the auditor’s opinion is presented in a constraining template that is largely driven by regulation.

Investors also voice concerns around timeliness of the audit opinion. A key message is that investors rely on information in preliminary announcements and ideally would like assurance at that stage; in fact, many erroneously believe that the information in the preliminary statement is always audited. But the audit of the financial statements may not be completed at the point at which the preliminary statement is issued. This is a challenge for the profession to address.

There are exciting opportunities for change in the future, but we cannot make progress alone. All market participants need to be engaged in the debate to ensure that change happens. I hope this report acts as a stimulus for action and, while we digest the findings and decide on our next steps over the summer, I hope it inspires you to do the same and to share with us your thoughts and ideas.

Richard Sexton, Reputation & Policy, PwC UK.

Richard Sexton

Reputation & Policy, PwC UK


Overview

Survey sampleIt seemed to us – in the context of the debate currently underway, internationally through the IAASB, in Europe in the audit policy considerations, and in the UK via the FRC’s consultation on ‘Effective Company Stewardship’1 – that one key voice was not being heard: the voice of those who deal day to day with investment decisions and shape the market. The findings in this report are based on in-depth interviews with 22 UK-based investment professionals in April and May 2011. The majority (15) were mainstream investment professionals, and the remaining seven were corporate governance specialists2. Both buy-side (13) and sell-side3 (9) analysts are represented, as are those who are equity focused (19) and fixed-income specialists (3).

We have shown the analysis by type of investment professional only when there are notably different responses among the communities interviewed.

Although the sample of investment professionals in our survey is not statistically significant, the responses give clear insights into their needs and preferences. This is an important audience who should be fully engaged in debates about the future of audit.

1. Effective Company Stewardship: Enhancing Corporate Reporting and Audit, Financial Reporting Council (2011)

2. Mainstream investment professionals are directly involved in the analysis of financial statements and other information in order to make, support or advise on investment decisions. Corporate governance specialists are investment professionals who offer insight to other investment professionals and management on issues of governance.

3. Buy-side investors are those analysts who seek to make investments on behalf of their respective firms. Sell-side analysts are those who do not make investment decisions for their own organisation but undertake research in order to recommend investment decisions for others.

• The audit affects investment decisions, but audit reports themselves do not give meaningful information

• Investors are selective about where additional transparency could be useful

• Information on the ‘behind closed doors’ aspects of the audit would be valuable, but there would be concern if this constricted open debate

• There is an appetite for more timely assurance

• Assurance is sought on metrics and narrative that currently fall outside the audit’s scope

Key messages from our survey


4. At the Building Public Trust Awards dinner in September 2010, Ian Powell outlined the following five-point plan: raising the standard of all the work we do to the standard of the best; improving transparency of the scope, processes and decision-making in an audit; extending the scope of the auditor’s report without changing the corporate reporting model to provide further assurance over narrative reporting; changing the reporting model and changing the scope of the auditor’s report as a consequence; and working for longer-term reform.

It is evident that investment professionals value audit as it is today, but they see scope for enhancements that would help their decision-making. Some enhancements could be generated from the work currently performed during an audit, others from future changes in scope. Clearly, some would be easier to achieve than others, but all are worthy of consideration.

However, it is impossible to divorce audit from the corporate reporting environment. As we outlined in a five- point plan published in Autumn 20104, we firmly believe that a wide-ranging, longer-term review of existing corporate reporting requirements and practices is required to identify:

• where there is duplication;

• where more information or clarity would be helpful; and

• where the current framework results in the output falling short of investment professionals’ expectations.

In the short term, we are encouraging audit committees to provide enhanced transparency around the audit process and are now seeking views from investors and others to help refine our plan. This survey is part of this process.

The debate that is taking place both nationally and internationally at present is an opportunity to consider how both companies and auditors can provide investment professionals and other market participants with more valuable information; it’s also an opportunity for the market to consider the role of audit in underpinning a broader data-set in the future. We would welcome the views of readers of this report to assist the development of our thoughts over the coming months.


While investment professionals clearly value the audit itself, their responses raise a challenge about the timeliness and content of the audit opinion and the scope of the audit. We should look again at the value of the information currently provided as part of companies’ preliminary statements.

Most of those interviewed are under the misapprehension that information published in preliminary statements is always audited. In our view, preliminary statements drive the market and should contain information about the key judgements made by the company.

Investors’ interest in assurance on the information currently contained in preliminary statements is an opportunity for investors and auditors to work together to consider what kind of assurance could be provided on what type of information at this critical stage in the reporting cycle.

The investment professionals interviewed do not believe they currently receive adequate information about the audit process; they offered suggestions of where more information would be valuable. These areas include: the auditors’ debates with management; aggressiveness of accounting treatment; likely areas of material misstatement; and going concern.

However, there are understandably significant concerns over the practicalities involved. In particular, they do not wish this further disclosure to limit the willingness of auditors, audit committees and management to engage in frank debates: as one investor said, ‘If you don’t have privacy, you don’t have honesty’. They also saw no value in additional disclosure if this just results in more bland or formulaic reporting.

We are not offering instant solutions; these are complex matters, requiring detailed discussions between all market participants, which in time will evolve into robust proposals for change. However, we have initiated work to increase the transparency of the audit process in audit committee reports. We will build on this work over the coming year, talking to a number of major companies about moving in this direction and using the findings from this survey as the basis for these discussions. We hope investors will likewise encourage companies to think about their current audit committee reporting and start to make changes.

Audit today


Assurance tomorrow There is strong interest among those interviewed for more assurance over quantitative performance measures – in particular, industry metrics and non-GAAP numbers (such as core or underlying earnings). There are mixed views among different categories of investor about the need for additional assurance, with buy-side professionals generally expressing more interest in additional information and assurance than sell-side. The findings suggest that the current level of assurance is appropriate for corporate governance disclosures; they also reveal little appetite for additional assurance over areas such as the company business model and strategy.

The areas where respondents would welcome additional assurance are those where they see that the auditor is best placed to provide this assurance and has the right skills to do so. We therefore need to consider how such additional assurance could be provided, and under what framework.

This is one reason why we fully support the FRC’s initiative to create a ‘financial reporting lab’, where innovations in corporate reporting and assurance can be tested. We believe that it is critical to the lab’s success that its priorities and work agenda are largely market-driven. Our survey suggests that one such priority might be a new framework for assurance. However, we will also continue to work with investors, companies and regulators on other innovations as part of the wider debate on the future of audit.

In the future, investment professionals tell us they would value more engagement and communication with auditors. We would also welcome this, and are keen to work with the investment community to identify what the best mechanisms and channels would be.

Investment professionals believe improvements could be made to the current model for corporate reporting and assurance. The challenge is for the audit profession, regulators and government to determine how best to respond. We are committed to taking this forward, building upon the work

Our commitment we have already started in a number of these areas and ensuring that we work with others to influence evidence-based change in this area.

The remainder of this report presents our analysis of the underlying findings from our survey.


Audit today

Knowing data is audited matters to investment professionals

We asked for interviewees’ level of agreement with the statement ‘Knowing data is audited does not matter to me because I always do my own due diligence’. The majority of investment professionals interviewed valued the fact that data is audited. 68% strongly disagreed with the statement, and a further 5% said that they disagreed. They appreciate that auditors have greater access to information than they can achieve themselves and the substantial work effort involved in an audit.

‘ Auditors see vastly more information than I do.... If there’s no audit process, there’s no independent oversight.’

‘ It’s vital for the operation of the capital markets that we have audited financial accounts.’


Mixed views over audit of non-GAAP information

We asked investment professionals to indicate their level of agreement with the following statement: ‘I am relaxed that non-GAAP information, e.g., adjusted core earnings, is unaudited’. In response there was a considerable divergence of views: 23% strongly agreed and a further 9% said they agreed. However, 5% strongly disagreed, and a further 41% disagreed with the statement, indicating a significant level of disquiet.

One reason for the uncertainty of some respondents about the value of assurance over non-GAAP data is the underlying quality of the data itself. The lack of consistency in the calculation of the figures provided by companies makes it difficult for investors to compare data. The real issue is the need for a better framework for the reporting model. Industry groups should work together to come to a common agreement about standards for calculation of such measures.

‘My concern is that every company has a random definition or idiosyncratic definition of adjusted earnings or operating earnings.’

‘My concern is not that the numbers aren’t audited – it’s just that they’re not comparable.’

‘I think it would be useful if auditors also audited non-GAAP information. In fact, if you’re telling me they don’t, I’m quite shocked.’


Usefulness of audit opinions

A total of 81% of those interviewed strongly agree or agree that they would be unlikely to invest in a company if the audit report indicated that the accounts were not true and fair. Investors and analysts clearly take comfort from a ‘clean’ audit report when making decisions about companies. There is an apparent paradox here: the fact that there has been an audit is critical for investment decision-making, but as we go on to see, the existing wording of the opinion does not communicate the value of an audit either sufficiently clearly or sufficiently promptly.

‘ What I do rely on is the information in the financial report. If the audit is clean, the implicit assumption is that I can rely on what’s in the financial statements.’

‘ If the accounts are not true and fair, then we would have a real problem.’

Half of those interviewed strongly agree or agree with the statement: ‘The audit opinion arrives too late to add value to my assessment of a company’. Moreover, 68% of those interviewed strongly disagree or disagree with the statement: ‘I always read the audit opinion on companies I follow’. Two issues therefore emerge: timeliness and usefulness.

Many refer to the formulaic nature of the opinion, which gives it limited value as a source of information for investment. More assume they would already know if a particular audit opinion had been qualified, through reports from brokers and in the media.

Given the focus of their roles, it is perhaps not surprising that corporate governance specialists are more likely to read an audit report than their mainstream counterparts.

‘I never look at [the audit report]. I assume that if there’s anything interesting in the audit report, half a dozen brokers will point it out.’

‘The audit opinion will tend to be boilerplate...so I don’t read it.’

‘I skim it. 99% of them are boring because they just say [the financial statements] have been audited in accordance with local standards and signed off; you’re only interested in something unusual.’

Some would like the audit opinion to be delivered alongside the preliminary statements. In many cases, investment professionals assume that numbers in the preliminary statements can be relied upon – even though the auditors have not yet expressed an opinion.

‘By the time the audit opinion says anything useful, it’s too late... The horse has already bolted.’

‘If there is an issue with the audit, I think that needs to be communicated whenever numbers come out.’


Little appetite to read audit committee reports

Overall, investment professionals have even less appetite for reading audit committee reports than they have for reading audit opinions. There is a split between mainstream analysts and corporate governance professionals in terms of their likeliness to read audit committee reports. Corporate governance specialists are far more likely to do so.

However, some of those interviewed expressed an interest in seeing a more frank explanation of committees’ activities and greater insight into the discussions held with auditors. Some applauded particular companies that already present comprehensive reports.

These investor views are encouraging, given the current debate about enhancement of audit committee reporting.

‘However little I read the audit opinion, it doesn’t compare with how little I read the audit committee reports.’

‘Unless we have a straight report from the audit committee chair, written to shareholders, we don’t read it.’

‘Most audit committee reports give nothing about the substantive discussion with the external auditor.’

‘I’ve never seen one [audit committee report] containing interesting information.’

Figure 1. I always read the audit committee reports of the companies that I follow

0%

0%

7%

57%

7%

29%

33%

0%

53%

14%

Strongly agree

Agree

Neutral

Disagree

Strongly disagree

Mainstream

Corporate governance


‘There are some very good audit committees and there are some really bad ones. Spotting the difference from our side is not always easy.’

‘Boards are a club and I don’t think they [audit committees] are ever sufficiently independent. I can think of almost no example of an audit committee doing what they’re supposed to do, in the sense of being independent.’

One aim that we have is to improve the transparency of the scope, processes and decision-making in an audit. We believe there is a lack of understanding of the activities auditors undertake and the discussions that take place ‘en route’ to producing the audit opinion. In a similar vein, the Financial Reporting Council (FRC) in its publication ‘Effective Company Stewardship’ proposes enhanced reporting by audit committees. We fully support such expanded reporting, with more clarity around how audit committees discharge their responsibilities and the ways in which they fulfil their role of holding management to account.

However, the credibility of such reporting will be established only if investment professionals actually read the audit committee reports and can be confident that they are written from an independent perspective.

The FRC’s document made a further proposal: auditors might provide a separate opinion as part of their audit report, which expresses their view on whether the audit committee report is complete and reasonable. The suggestion therefore is that the independent perspective provided by the auditor would give more credence to the audit committee’s narrative.

We explored with investors their views on the independent perspective given by audit committees and auditors over such reports. There were mixed views, with interviewees in general finding it quite hard to generalise.

Transparency and credibility


Mainstream analysts are more positive about auditor independence than corporate governance specialists.

‘ Broadly speaking, I think probably auditors have too much at stake to be too close to management.’

Some participants believe that the perception of auditor independence is affected by investment professionals’ inability to observe the rigour of the debates that take place behind the scenes. We would concur with this, and it is one reason for our support of transparency around the ‘behind closed doors’ conversations.

We asked whether investment professionals would be supportive of the FRC’s proposal that an audit opinion should cover the completeness and reasonableness of an audit committee report.

There is strong support for this suggestion. Significantly, every corporate governance specialist backed this idea. In general, it was thought to be a good way to encourage greater transparency by, and accountability of, audit committees.

Figure 2. If auditors expanded their audit report to cover the completeness and reasonableness of audit committee reports, would you find this useful?

Yes

No

76%

100%

24%

0%

36%

Overall


Mainstream

64%

‘It gives both the responsibility and power to the auditors to actually push back when audit committees are not giving the correct information. I think it’s a really important dynamic to what goes on behind the veil.’

‘This whole concept of opining on the audit committee’s report is worth exploring... It’s worth reporting on the balance and reasonableness of the audit committee report.’


More value from existing auditInvestment professionals would value extra information

In the survey, we highlighted four areas where additional information about today’s audit might be disclosed; investment professionals place importance on all four. They also express doubts about the adequacy of current information provision in these areas.

The divergence between importance and current adequacy is stark. However, when asked to elaborate on their opinions, investment professionals said they saw a difference between the ideal reporting scenario and what is realistically achievable. They saw potential practical problems (including legal issues) with greater disclosure in some areas.

Several of those interviewed were concerned that expanded reporting could reduce the likelihood of open and honest discussions between auditors, management and audit committees, with a risk of inadvertently damaging audit quality.

‘If you don’t have privacy, you don’t have honesty. And if you don’t have honesty, nothing properly gets done.’

The way that any extra information is communicated is also an issue for investment professionals. None sees value in simply more formulaic reporting.

Figure 3. Getting more value from the existing audit

73%

39%

86%

26%

88%

16%

81%

13%

Basis for going concern view

Areas where there is a riskof material misstatement

How aggressive the company is,compared to its peers, in judgements and

application of accounting standards

Areas of significant debate between auditors,management and audit committee

Importance

Adequacy

Not importantor inadequate

Highly important or highly adequate


Going concern Overall, investment professionals place relatively low importance on receiving more information about going concern. There is relatively high satisfaction with the adequacy of information currently received about going concern.

Some of the survey participants feel it is not the auditor’s role to provide additional detail on the going concern status of a company. Analysts feel that they are well placed to make their own assessment, given the focus of their role on forecasting future company performance.

However, going concern is an area where a clear difference of opinion emerges between corporate governance specialists and mainstream analysts.

Corporate governance specialists place high importance on the need for additional going concern information, and rate the adequacy of current disclosure poorly. Mainstream analysts do not consider the area unimportant, but feel there is access to significant information from management and other sources.

‘It’s too late by the time you comment on going concern. If you raise a comment about going concern, I’ll have known for at least six months, probably a year.’

‘I don’t think it’s your job as an auditor to help me understand whether the company is a going concern, because I think your job is to analyse and sign off the past... I don’t value your opinion on whether the company’s going to survive or not...’


Interest in areas where there is risk of material misstatement and in transparency around aggressiveness in accounting

There was strong interest in gaining more information on areas where there is a risk of material misstatement, perhaps where significant judgement is applied or there is a heightened risk of fraud.

‘It seems reasonable to ask the auditors to have published with the management’s annual report and accounts...the areas that the auditors explained to management they would be focusing on because there is a risk of material misstatement.’

Investment professionals are also highly interested in learning how aggressive a company is compared to its peers in terms of significant judgements and the application of accounting standards.

‘The perfect scenario is I’m a fly on the wall when the audit partners are talking about the areas where clients are pushing for the most favourable accounting treatments.’

‘I’d love to have something in terms of aggressiveness [of accounting], as long as it didn’t become boilerplated.’

Clearly, getting the balance right is key to enhancing communication with investment professionals.

However, there were questions about how this could practically be communicated. Some believe that better disclosure about key accounting policies and management estimates would go a long way to providing a perspective on aggressiveness. Others talk of industry analyses that compare and contrast accounting choices and estimates used across a sector. However, no overall consensus emerged.

‘Analysts are very keen to know if the company is doing something that’s different from its peers. It’s all about comparison.’


Interest in areas of significant debate

Areas of significant debate between auditors, management and the audit committee are also considered as highly important. However, once again, there is concern about the practical challenges that could arise when trying to deliver any genuinely helpful insights. Would the requirement for additional disclosure make all parties less willing to engage in a full and frank exchange of views? Would the result be more template-style reporting? Neither outcome was deemed desirable by many of those interviewed.

‘Audit committee reports should report some of the communications that go on with the auditor.’

‘A bit like the family’s dirty linen, it might genuinely be better for you if you don’t know. There has to be a level of confidentiality and a level of privacy of discussion.’


Assurance tomorrow

Audit provides a high level of assurance. Lower levels of assurance can be and are provided for certain types of information and reporting, such as reading the narrative sections in the annual report for consistency with the financial statements.

So if given a free choice, what levels of assurance would investment professionals like to see applied to a range of information types?

All of those interviewed want the highest possible level of assurance to continue for the primary financial statements and accompanying notes.

However, the level of assurance desired for other areas varied significantly. Three broad categories have emerged:

• quantitative performance measures (primary statements and notes, non-GAAP financial information and industry metrics);

• corporate governance matters (including directors’ remuneration and CSR information);

• annual report ‘front end’ and strategic issues (business risk, other KPIs, explanation of business model and company strategy).

We discuss each of these in the following pages.

Figure 4. Level of assurance desired by information type

No assurance A high level of assurance

100%

67%

63%

50%

43%

36%

35%

18%

18%

15%

Primary statements and notes

Non-GAAP financial information

Industry metrics

Directors’ remuneration

Information in ‘front end’ of theannual report on business risk

Other KPI’s

Corporate governance information

CSR information

Company’s explanation of business model

Company strategy


Quantitative performance measures

As Figure 5 demonstrates, all investment professionals want the highest level of assurance for the primary statements and notes. However, there is also a demand for a high level of assurance on other quantitative information typically used when building economic models and analysing company performance. This includes non-GAAP information (such as adjusted earnings) and industry metrics generated by the company (such as same-store sales, pipeline data, RPU (revenue per user) etc); buy-side analysts typically require more assurance on such information than the sell-side.

However, the investment professionals interviewed are concerned that assurance should not result in a constraint on management’s freedom to report the non-GAAP information they use when running the business – and that could change over time.

‘The ideal would be that when a company talks about its sales or net profit or operating income that you know that those numbers – or at least what goes into those numbers – has been audited.’

‘The test of whether the information is useful is whether it’s used internally in a company. If it’s how a company runs the business, then it’s interesting and useful to me.’

‘One of the fantastic things about non-GAAP financial information is that it changes and something you think is very useful today, you might have thought was of no use 10 years ago and might be of no use in 10 years’ time. I want to give companies the ability to develop their own language.’

‘Things like non-GAAP information, you can’t give me a high level of assurance because there’s no set of definitions.’

Figure 5. Quantitative performance measures - assurance tomorrow, buy-side vs sell-side

Sell-side

Buy-side


11

Primary statements and notes

Non-GAAP financial information(e.g., adjusted earnings)

Industry metrics (e.g., same-store sales,pipeline data, RPU etc)

100%

100%

56%

75%

50%

71%


Figure 6. Corporate governance information – assurance tomorrow

50%

35%

18%

Directors' remuneration

Corporate governance information

CSR information


Corporate governance In respect of corporate governance information, contrary to some of the debates happening at present, it appears there is little enthusiasm for high levels of assurance on the more general corporate governance areas, including information related to corporate social responsibility. Most feel that the status quo is appropriate. There is more appetite for information and assurance on directors’ remuneration. This is an area that is already subject to audit.

‘It’s helpful that the auditor reads through [corporate governance information] and can draw attention to any gaping errors, but it’s up to the investor to police that, I think.’

‘It’s vital someone looks at the numbers [on directors’ remuneration]. And I want some assurance that the numbers have some basis in fact.’


There is some enthusiasm for assurance on information in the front end of the annual report addressing business risk. This is stronger among corporate governance specialists than mainstream analysts. However, because of uncertainty about what this would look like, there were concerns that it could develop into formulaic and not particularly meaningful disclosure.

‘Auditors are in a better position to form a view on the relative risks, and I would find some assurance on that helpful.’

‘I do find lots of instances where the front part of the report doesn’t stack up with the back part of the report.’

Although some assurance is deemed desirable for ‘other KPIs’ (such as human capital metrics and measures of customer satisfaction), this is less important to analysts than assurance for commonly used industry metrics. Investment professionals are concerned about the standardisation and comparability of such ‘other KPI’ data.

Again, contrary to some current debates, those interviewed send a strong message that they do not see value in auditors providing assurance on the explanations of companies’ business models and strategy. They do not see this as part of the auditor’s role, nor necessarily appropriate to the auditor’s skill set.

‘It’s primarily the management’s job to explain their business model. They shouldn’t have any difficulty with that.’

‘You want the company to have flexibility to describe the business model in its own way... so I don’t think you’d need assurance for that.’

‘Front end’ and strategic matters

Figure 7. ‘Front end’ and strategic matters – assurance tomorrow, mainstream vs corporate governance



Mainstream

Information in ‘front end’ of theannual report on business risk

Other KPI’s (e.g., human capital,metrics, customer satisfaction)

Company’s explanationof business model

Company strategy

25%

15%

57%

37%

43%

33%

13%

17%


Different information channels require differing assurance

Investment professionals receive information through a range of channels – do they see a need for assurance over all of these?

All investment professionals interviewed agree that information in the annual report needs to be assured. They also generally assume that the data provided in the preliminary statement will not differ from that presented in the annual report.

As can be seen in figure 8 below, 64%, would like a formal statement of assurance attached to the preliminary statement. The remaining 36% are comfortable with the knowledge that the auditor, having reached an advanced stage of the audit, has agreed to the release of the preliminary statement by the company. However, these comments do link back to the timing issues that emerged when the general value of the audit was discussed. This is something that we will be looking at closely in the future.

‘Prelims are unaudited, and that doesn’t seem sensible for the profession or for the interaction between companies and shareholders.’

The investment professionals interviewed typically think that explicit assurance on information outside of, but derived from, the financial statements (such as information presented on a company’s website) is unnecessary. However, they would want comfort that the company’s processes ensure consistency between the website information and the financial statements.

Most of those interviewed do not want investor presentations to be subject to assurance. Some think this could result in a lack of creativity or ambition in the content of investor presentations, a development they would not welcome.

Figure 8. Assurance required over preliminary statement

64%36%

Yes

No


Areas for future change Those interviewed have a number of suggestions for ways in which, in an ideal world, the investment community could be better served by auditors and the audit process; some of these are outlined below. Some suggestions represent radical thinking in today’s world, with practical and in some cases legal issues to be addressed, but they bear consideration for the future.

These suggestions include:

• Periodic meetings between the auditor, audit committee chairman and shareholders

• Direct access to the auditor – for example, being able to call them to ask about key areas of a company’s financial statements

‘For me, it would be interesting....if I had a question, to be able to pick up the phone or have someone to talk to...who was involved in the audit. That would be useful regarding certain issues that are important....like revenue recognition; things like tax, which investors don’t understand and are extremely relevant.’

‘I think auditors should be required to attend the AGM, because if people do have concerns they should be able to voice them and ask questions – quiz the auditor.’

• An individual shareholder being able to have a tripartite conversation between themselves, the auditors and the audit committee

‘The three partners – the auditors, the non-executives and the investors – aren’t really talking to each other and don’t really know what each other wants.’

• Auditors giving audit opinions akin to those of credit agencies, such as AAA or AA-, which allow for more shades of grey to be conveyed

‘If the audit report improves to the extent that there’s a lot more interesting information in there, then it could be a rich source of information.’

• Provision of an auditor’s assessment of company risk (such as a version of auditors’ current client acceptance data)

• Investment professionals being able to attend teach-ins on the audit process to help them understand how auditors work and the assurance provided by an audit.

‘There has to be an education as to what auditors actually do.’

‘I would value more transparency about how firms are driving scepticism through their organisation. For example, how are you training the junior staff to be really sceptical...not to be trapped in the process, but walk outside their checklist and, when necessary, follow their nose.’

www.pwc.co.ukPwC firms provide industry-focused assurance, tax and advisory services to enhance value for their clients. More than 163,000 people in 151 countries in firms across the PwC network share their thinking, experience and solutions to develop fresh perspectives and practical advice. See www.pwc.com for more information.

This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers does not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

© 2011 PwC. All rights reserved. Not for further distribution without the permission of PwC. ‘PwC’ refers to the network of member firms of PricewaterhouseCoopers International Limited (PwCIL), or, as the context requires, individual member firms of the PwC network. Each member firm is a separate legal entity and does not act as agent of PwCIL or any other member firm. PwCIL does not provide any services to clients. PwCIL is not responsible or liable for the acts or omissions of any of its member firms nor can it control the exercise of their professional judgment or bind them in any way. No member firm is responsible or liable for the acts or omissions of any other member firm nor can it control the exercise of another member firm’s professional judgment or bind another member firm or PwCIL in any way.

Design & Media – The Studio 20723 (06/11)

Richard Sexton+44 020 780 [email protected]

Pauline Wallace+44 020 780 [email protected]

Margaret Cassidy+44 020 721 [email protected]

Alison Thomas+44 020 721 [email protected]

Contacts

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