Financial Reporting Audit - Global vision

The top six accounting firms have united to produce a vision for the future of financial reporting. Accountancy reproduces an extract.

In an unprecedented move last November, the Big Four, plus Grant Thornton and BDO International, have proposed completely overhauling the company reporting model. Their vision for the future is contained in Global Capital Markets and the Global Economy: A Vision from the CEOs of the International Audit Networks.

The group, known as the Global Public Policy Group, launched their ideas at a symposium - 'Investor needs and the role of the auditor - a vision for the future' in Paris.

We publish an extract from the ground-breaking joint paper, which is aimed at generating debate on the issues raised.

The importance of information in this new world

(These) changes in economic and business activity are having and will continue to have major implications for the kinds of information investors will need from corporate reports in the future:

•    The value of many companies resides in various 'intangible' assets (such as employee creativity and loyalty, and relationships with suppliers and customers). However, information to assess the value of these intangibles is not consistently reported.

•    Billions of people around the world now have the ability to access information instantaneously. Yet when it comes to financial reports, investors must wait for companies to publish data only once a quarter, every six months or annually.

•    The information technology revolution has made data customisation easy to use and broadly expected. However, today's financial reports remain largely one-size-fits-all, and are not sufficiently accessible to many investors.

In short, the same forces that are reshaping economies at all levels are driving the need to transform what kind of information various stakeholders want from companies, in what form, and at what frequency. In a world of 'mass customisation', standard financial statements have less and less meaning and relevance.

The future of auditing in such an environment lies in the need to verify that the process by which company-specific information is collected, sorted and reported is reliable and the information presented is relevant for decision-making. Moreover, because many enterprises increasingly are doing business in multiple countries while investors increasingly are buying the shares of companies from around the world, stakeholders and investors in particular want to know that the information they are getting is compiled, classified, reported and audited on a consistent basis across countries.

The role of public company auditing

As leaders of the world's largest global audit networks, we are committed to facilitating the changes that will continue to come to business reporting, as demanded by various stakeholders.

We are also keenly aware of mistakes made by some members of our profession in recent years, and have instituted significant changes in both our operations and our focus to assure that history is not repeated.

Nonetheless, there are a number of barriers that must be addressed to ensure our profession's ability to deliver the services that stakeholders need now and in the future:

•    There is a misalignment (which differs in nature and degree by country) among companies, users of information, regulators, policy makers, the media and the auditing profession. This misalignment perhaps is most apparent with respect to the 'expectations gap' relating to material fraud and the ability of auditors to uncover it at reasonable cost.

•    The auditing profession needs to develop the talent and expertise to deliver consistent, high-quality audit services in the coming environment, both through the hiring of outstanding individuals and the training of auditors in new auditing techniques (especially evolving information technology, fair value models and expanded business information).

•    Various legal and regulatory impediments are adversely affecting both client companies and audit professionals. Different legal and regulatory regimes make it more costly for companies to do business, while the increased liability risk inhibits companies from reporting the kinds of non-financial and forward-looking information that many stakeholders surely would find valuable.

The challenge now before all stakeholders in the capital markets is to overcome each of these barriers to provide more relevant and reliable company information and the appropriate level of assurance needed to garner trust and confidence in that information. This can be done, but only if all of these parties are actively involved in the solution.

Strengthening financial reporting and the audit function.

Near-term measures: In the near term, the following 'convergence' processes must be completed to benefit the global financial markets and their stakeholders:

•    Complete the effort by the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) to harmonise differences between international and US reporting standards, as currently envisioned. Complex rules must be resisted and withdrawn. Today's rules can produce financial statements that virtually no one understands. Standards need to be principles-based.

•    Launch and complete a similar process for the convergence of national audit standards, which should make use of the International Standards on Auditing (ISA) that already have been developed with the oversight of the Public Interest Oversight Board (PIOB) of the International Federation of Accountants (IFAC).

•    Similarly, minimise national differences in the oversight of auditors and enforcement of relevant audit standards, including rules relating to the way auditors conduct their activities. The recently established Independent Forum of International Audit Regulators (IFIAR) may be the appropriate body to pursue this objective. We are encouraged by recent statements from the US audit regulator, the Public Company Accounting Oversight Board (PCAOB), that it intends to join and actively participate in IFIAR.

Consistency in business reporting standards, audit standards and enforcement of audit standards is necessary to support a global economy with the lowest cost of capital. Alignment of the accounting profession and the regulators around common objectives and application of principles-based standards will enable companies to produce consistent global information. A sensible global regulatory framework also will reduce barriers to growth and entry by other audit firms or networks in our profession, thus providing increased choice for auditing services.

Longer-run measures: Over the longer run, experts agree that the current systems of reporting and auditing company information will need to change - toward the public release of more non-financial information (some or much of which may be industry-specific) customised to the user, and accessed far more frequently than is currently done.

It is time, therefore, for all global capital markets stakeholders involved to launch a process that will lead to the development of a new business reporting model, with a clear identification of the role of the independent audit and requirements dictated by that model.

Our firms pledge to work with issuers, investors, regulators and other market participants to develop this new model including ways of disseminating a broad array of company information to users in a manner more suited to the internet age than the traditional quarterly and annual reports.

Samuel A DiPiazza, Chief executive officer, PricewaterhouseCoopers International Ltd Mike D Rake, Chairman, KPMG International David McDonnell, Chief executive officer, Grant Thornton International Frans Samyn, Chief executive officer, BDO International William G Parrett, Chief executive officer, Deloitte James S Turley, Chairman and chief executive officer, Ernst & Young

To read Global Capital Markets and the Global Economy: A Vision from the CEOs of the International Audit Networks, visit globalpublicpolicysymposium.com.

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