It is time for finance directors to break out of their prison. It is time for them to exercise more choice in terms of how they provide assurance to their investors, shareholders and other stakeholders. It is time for them to grasp that freedom. These could be revolutionary times. But instead everyone seems stuck in their blocks, waiting for the starting pistol to fire.
All these ideas came to the fore at a recent debate hosted by the ICAS, entitled Should Statutory Audit be dropped and Assurance needs left to the Market? The rumbustious Guy Jubb, investment director and head of corporate governance at Standard Life, took the floor with a pocket analogy of the delegates teetering about on almost motionless bicycles. “There has been little in the way of choice, in terms of assurance needs, for shareholders, or indeed for directors,” he said. “To my mind, it has been rather like a slow bicycle race. We are stuck rather close to the starting line.”
He hoped that soon the race could properly start. Among his manifold complaints was the statutory audit report. “Boilerplate of the highest order”.
Jubb has a point, but the problem is a traditional one. No one other than the participants is privy to what goes on between a finance director, the audit partner and the audit committee. The real work takes place in secret. It is predictable that what the outside world and the investors get is boilerplate. As another participant in the debate, Stephen Haddrill, chief executive of the Financial Reporting Council, pointed out, “the investor probably only sees the tip of the iceberg of that work”.
He, too, sees a real problem here. “Investors are more in need of good audit now than ever before,” he said. “Certainly there is more analysis out there in the market about companies than there has been, more reports and more studies for them to rely upon.” But that just underlines the depth of the problem. “Investors themselves,” he said, “have less power to challenge companies than they have had in the past because shareholding is becoming a more fragmented activity.” There are ways out of this, but they all rely on the auditors somehow providing more information.
Jubb thinks there needs to be a change in culture. He wants the idea of stewardship to be enhanced. For him the word stewardship means a great deal more than the word governance and would drive people towards a more sensible relationship between auditors, investors and regulators. He thinks it would steer the whole argument towards emphasising the importance of judgement and of making that judgement, and how it is reached much clearer.
“When you see an audit report it is not always obvious where judgement has been exercised,” he said.
But how do you make the audit report more useful? That would require the aforementioned change of mindset among auditors. And it was clear from the points made by the auditor in the debate, Ian Powell, chairman of PricewaterhouseCoopers, that this was not going to be easy. The problem for auditors is that their own self-interest creeps into this argument.
They will talk, as Powell did, of the need for safe harbours, for both directors and auditors. The problem is that, for audit firms, what should be an argument about increasing the amount of information that the audit report provides always turns into an argument about protecting the remuneration of partners from the threat of litigation.
There is no doubt that, with the emphasis in reporting moving towards a desire for more narrative, due to the unintelligible complexity of the financials, the assurance aspects should change too.
The problem, frankly, is the auditors – they are the slowest of cyclists.
Robert Bruce is a leading commentator on accountancy issues
Former chief financial officer of Domino Printing Sciences joins Xaar board as audit committee chair
Investors at loggerheads with company bosses over key issues such as performance incentives, PwC survey finds
Many of our largest companies seem to be struggling to get the 2016 annual report on remuneration approved. At this stage shareholders shouldn't have more powers to influence remuneration, argues Wedlake Bell's Edward Craft
FRC guidance clarifies requirements relating to going concern and solvency and liquidity risks