PwC is calling for statutory audits to provide more information about companies’ risks and future prospects following research into audit effectiveness which found that the majority of businesses and investors criticise the current audit process
It says that current audit practices fail to meet the needs of investors and the wider community.
The firm is seeking to encourage wider debate around the future of audit and has gathered hundreds of points of view over the past eight months through roundtable events, meetings with senior business leaders, investors and other interested parties, an online forum and a survey of business leaders and investors.
The survey found that while both the investment community (68%) and business leaders (80%) think today’s statutory audit serves the needs of companies, under half (41%) of the investment community and 68% of the businesses surveyed feel that the audit meets the needs of investors.
Just a third (32%) of investors and only half (52%) of businesses believe audit is effective at meeting the needs of wider stakeholders, such as employees, customers and suppliers.
The survey also found a broad consensus on the desire for more insight and clarity in the audit on the future risks a company faces. Some 72% of investors and 79% of businesses are in favour of more information about a company’s future prospects and risks in the central scope of a statutory audit. However, the position is less clear cut on issues such as forecasted performance metrics and corporate culture, ethics and behaviour.
Respondents wanted more insight about the material uncertainties facing a company, and also felt audits should consider the need to provide assurance over other forms of risk.
However, the majority of both groups surveyed did not feel that going concern needs to be extended beyond 12 months. Of those who did favour an extension, the preference is for two years from the business community and three years from investors.
There is also broad backing for strengthening the quality of reporting by bringing a company’s internal controls within the scope of the audit and strong appetite amongst investors (64%) and businesses (82%) – large and small, listed and family-owned – for the scope of the audit to be flexible and tailored to the type of company being audited.
Three quarters (76%) of investors and 84% of business leaders believe the use of technology such as AI, automation and data analytics would increase the efficiency with which the audit is performed. While there is consensus that technology will increase the level of scrutiny and overall quality of audits, only 37% of businesses and 36% of investors think technology will enable auditors to better understand a business.
Among the themes emerging from the initiative were the need to strengthen the clarity and relevance of corporate reporting and to enhance the reporting and auditing of a company’s internal controls.
Those who contributed wanted to see better engagement between the audit profession, company management, shareholders and other stakeholders. There was also a desire for auditors to create a single, coherent piece of company reporting that provides more insight into the future prospects of the company – including the scenarios in which the business model could fail.
Hemione Hudson, head of audit at PwC UK, said: ‘The findings suggest that the audit could go further to address the needs of the business community and investors. This underlines the need for the audit to evolve to meet the expectations of stakeholders, and to help rebuild trust in businesses and the capital markets.
‘At PwC, we are working hard to ensure that the quality of our own audits continues to improve, and have put in place a substantial programme of measures to support this. But it is clear that improving quality alone will not restore trust in the audit. The audit needs to evolve and a more fundamental review of the entire corporate reporting system is required to ensure stakeholders can have confidence in the information they need for decision making.’
PwC says it is making the Future of Audit paper widely available to help inform and encourage further debate and has shared it with Sir Donald Brydon, who is currently conducting an independent review into the quality and effectiveness of audit.
Pat Sweet | 23-07-2019