Audit committee chairs, investors, UK Financial Reporting Council representatives and practitioners expressed concern over some of the UK Competition Commission’s provisional findings at an Audit Quality forum held in London.
The panellist brought together by the FRC, Institute of Chartered Accountants for England and Wales and the Department for Business, Innovation and Skills, offered their views on ensuring audit quality, avoid boiler-plating of audit committee reports and good corporate governance practices.
One of the main issues discussed was around the CC’s finding that audits are not addressing shareholder needs and the role of audit committees.
FRC’s executive director of codes and standards Melanie McLaren emphasised the bodies revised Corporate Governance Code should not be seen as a threat to audit committees, but instead an opportunity to demonstrate to investors that audit committees are doing their job well.
McLaren said despite being populated by "qualified, knowledgeable and diligent individuals", audit committee reports give no real insight into the working of the committee, and have been seen by the CC as "failing to ensure audit quality and the independence of the auditor.
Threadneedle Investments head of governance and responsible investment Iain Richards said investors don’t want to see auditors hide behind audit committees and, overall, most audit committee reports are boiler-plate. However, he added, improvements have been felt in the past couple of years.
"In future we don’t just want 30 pages added to the audit committee reports. We want explanations of some of the rationales, issues raised and how those concerns were addressed etc.," Richards said.
Next plc audit committee chairman Steve Barber said that experience has shown that with more disclosure it’s hard to avoid repeating information and consequently boiler-plating.
"I think it is important to support more disclosure, but keep in mind less is more. Audit committee reports should not get out of hand as remuneration committee reporting has," Barber said. "Remuneration committee reports have started taking up 30 pages of annual reports, up significantly from a few years ago when they took up a page or two."
Barber also said that the importance of audit committee reports is to reveal the sensitivities and not for the audit committee to redo an audit.
PwC partner Andrew Ratcliffe criticised the CC’s finding that auditors are constrained by management in their communication to investors. "This assumption is wrong. Auditors have rules, standards and regulations that are constraining," he said.
Tendering and rotation
Barber said despite FRC’s guidance on 10-year mandatory tendering under comply or explain principle, he believes that audit partner rotation is far more significant than a change of an audit firm.
"There are a lot of costs involved in the tendering process and there will be a lot of tender proposals as a result of new guidelines, which will cost thousands of pounds, but won’t be won," he explains. "Tendering is a big investment for a firm."
Premier Oil and Drax director and audit committee chair David Lindsell warned that companies need to be mindful of quality as they retender their audit or have to change because of rotation rules. "Research shows risks to quality are higher the first year or two after changing auditor," Lindsell explained.
The panel also discussed the price of an audit and the pressure on fees. Richards said that many investors don’t mind paying more for an audit as long as it means high quality and good insight. "Investors are worried by the news of lowering fees," he said.
Richards, as well as other investors in the audience also raised concerns over auditor independence in relation to offering non-audit services to audit clients. "I think there is a concerns over non-audit services offered to an audit clients and it’s a question of what this mix and matching of audit and non-audit services means for auditor independence," he said.