Interesting stuff from KPMG here:

We’re left therefore, with unresolved tension between the fact that stakeholders want clearer reporting of business risks and the view that providing those disclosures with credibility, through assurance, is too expensive.  Now clearly auditors cannot be taken to task for failing to identify misstatements in narrative reporting that has been scoped out of their work for cost reasons!  But what is the point of audit if audit is not to the point? The point is that stakeholders increasingly focus on leading indicators of performance and not past financial performance.  It is by assuring these data points that audit gets to the point – this is how we will refocus audit to make it fit for today’s world. 

I'm not sure I entirely agree with this. You see, the auditors opine over a long document that, frankly, virtually nobody (Oliver Tant excepted, perhaps) actually reads. Sorry guys. You work incredibly hard through dark evenings in the winter to produce an audit report over a set of numbers that no-one looks at.

Because the market never sits around waiting patiently for the auditors to tell them the numbers are okay. The markets are constantly moving up and down in response to new bits of information, intelligence about market opportunities and investment decisions, and assessments of risk and consumer confidence. Through the year, directors of companies are required by the Listing Rules to disclose salient bits of information to the market (on pain of extreme penalty). So, by the time the annual accounts come out, the market has a pretty clear picture of how the past year has gone.

Those investors who don't track the market every day are also extremely unlikely to read the accounts in full. Although their influence has declined, lots of people still get their financial information from the media. Journalists tend to not really understand accounting, so they pick bits out of the accounts in search of a good story. This means that the papers often report proforma or non-GAAP figures as if they have equal authority with the statutory numbers.

Taken together, this means that the audited accounts are a pretty useless source for forward-looking market-moving information. They're too big, too unwieldy and are produced too late to do that. But they do serve a very important governance function, which is this. Without the audit, there would be nothing to ever hold directors to account. Investors would be unable to know whether directors were telling them the truth or whether they were being sold a tissue of lies. Because of the auditors, the directors must (broadly) tell the truth to the markets because they'll be unable to get a clean audit report at year-end if they don't. The auditors are the ultimate day of reckoning for dodgy directors.

Which, I'm afraid, means that Tant's cant about refocusing the audit report on forward-looking leading indicators of performance simply isn't necessary. Auditors are already vital. They're the anchor that help keep directors grounded in reality, not the telescope that helps users see where the company is going. Auditors have got to re-educate a sceptical world about what the audit can and cannot do.

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• The lazy anti-auditor rhetoric must stop

Filed under: Auditing with tags annual report, audit reports, big 4, kpmg, listing rules, marconi, oliver tant