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December 9, 2010

Support for transparency initiative

Audit committee chairs appear open to providing more information in their governance reports in order to improve the transparency of the audit process, PwC UK senior audit partner Andrew Ratcliffe said.

PwC audit partners are now approaching the audit committee chairs of FTSE 100 clients to see if they would support an initiative to disclose more information in their reports.

“We had one client where we talked it through with them and their reaction was that it is a good idea and they would do it,” Ratcliffe said.

“In fact, they are now drafting [the audit committee chair report] on that basis. It is probably still a work in progress, but I am not aware of anybody who said, ‘No, definitely not, over my dead body’.”

PwC’s transparency campaign encourages audit committee chairs to disclose auditor conversations, such as significant risks of misstatements.

An audit committee governance report, which sits in a company’s annual report, is thought to be the best vehicle to disclose additional information on audit due to the freedom committee chairs have over their narrative.

Changing the format of a formulaic audit report, which is governed by standards, would be a lengthy process that involves changing the law.

The success of the campaign will hinge on ensuring the new style of report is concise, easy to understand and does not add excessive pages or complexity to annual reports; PwC’s mock-up of a new governance report is about one-and-a-half A4 pages in length.

Ratcliffe said a future step towards improving transparency is to provide more meaningful assurance over narrative reports. At present, auditors are only required to read narrative reports and flag something that is inconsistent with the financial statements or factually incorrect.

“It is a limited brief and it’s a negative assurance,” Ratcliffe said.

“Maybe we should talk about the narrative statements being a fair presentation or a faithful narrative of something that gives a higher level of assurance than this convoluted negative thing we have at the moment.”

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