Auditor Report: Baseline Set, Now Searching for ‘Sweet Spot’ in Investor Communication (Video)

Communication between auditors and investors was the topic of a recent interview with Vincent Papa, PhD, CFA, director of financial reporting policy at CFA Institute, and Mark Vaessen, KPMG International global head of International Financial Reporting Standards (IFRS) activities, who had leadership responsibilities on KPMG’s Way Forward for Audit Initiative.

Papa shared that CFA Institute has conducted surveys with investors to understand what they want auditors to communicate in their financial reports. Vaessen offered his views on the reform proposals, and how KPMG now communicates with the world.

At present, the audit report has standard wording, Vaessen noted. “So basically every audit report has the same words. And it’s a binary pass-fail opinion. In most cases, thankfully, companies will pass. But you also hear people say, ‘It doesn’t tell me a whole lot.’ The feedback we’ve had from stakeholders, investors, in particular, is that they want to hear more about what the auditor has done and learned during the course of the audit,” he said. As a result, in the UK, the report now provides a broader picture of the auditor’s findings about a company, not only the pass-fail report, but also what the key audit measures were. Traditionally, this information was shared with boards, but since 2013, these reports have been shared with UK investors, Vaessen said. The International Auditing and Assurance Standards Board (IAASB) has also called for such reforms, which will go into effect in 2016. So many other countries will follow suit based on what the UK has done, he said.

“As to what KPMG has done, first of all, we have complied with the standard, as anyone else, but we wanted to be even a bit bolder and take the new audit report one step further. We did a pilot with three companies,” and decided to share with investors what the auditor found to be a risk, information that isn’t part of the reform proposal requirements. Looking at the UK investor feedback so far, it has been very positive, and not only from the three companies being field-tested. “What we hear is that investors get a better sense of what an audit is, and maybe also what it is not. … This expanded audit report helps us to close that expectation gap [between auditors and investors], and it also helps assess what audit quality is.”

Papa likened KPMG’s “ratcheted up” efforts, which build on the existing baseline, to looking for “the sweet spot,” where investor-auditor communication is concerned. “Where do you get to that point where you are optimally communicating with investors?” Vaessen responded, “It’s important for your [investor] community to speak up and let us know where they believe that sweet spot is.”

View the entire interview here.

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