Public Interest Committee round table -12 November 2015

Meeting notes

The objective of the round table was to seek views, particularly from investors, concerning: the public interest, proportionality, and the importance of judgement and principles based standards and guidance, in securing high-quality audits. The round table was aimed particularly at the middle market.

Present

Tom McMorrow, Ethics Partner, RSM Audit UK (in the Chair)
Roger Alexander, PIC, RSM Audit UK
Mark Babington, Deputy Director, Audit Policy, FRC
Yvonne Carus, RSM Audit UK
Mohammed Eldaly, School of Management, Bradford University
Jonathan Ericson, Head of Audit, RSM Audit UK 
Professor Stella Fernley, Bournemouth University
Derek Lemay, Chair of Audit Technical Committee, RSM Audit UK
Ian Byatt, PIC, RSM Audit UK
Charles Henderson, UK Equities Business Manager, Invesco
Harry McAdoo, Director of Communications, ICAEW
Paul Smith, Deputy Director, BIS

Introduction

Tom McMorrow welcomed the participants, drawn from practitioners, regulators, investors and academics. He hoped that the PIC papers circulated to participants, namely The Public Interest, the supply of Audit, Proportionality and the position of RSM and How useful can Statutory Accounts (and Audit) be to Investors? would be useful to participants at the round table.

Ian Byatt introduced the main points in the papers stressing:

  • the importance of uncertainty in economic life; 
  • the importance of quality in audit; 
  • the need to maintain a satisfactory supply of audit and assurance providers (particularly in view of the changes to the provision of non-audit services arising from the audit regulation); 
  • the need to identify and practice due proportionality, bearing in mind the nature of audited businesses; 
  • the responsibility of the directors of audited entities;
  • the importance of judgement in audit; 
  • the role of the Investor Forum; 
  • the shortcomings of modelling of the future; 
  • the limits to the role of regulation; and 
  • the government’s deregulation challenge to deliver substantial savings to business.

The following points were made in discussion. It was felt that the nature of the public interest would depend on the situation. Audit was concerned primarily with the protection of owners, investors and other users of annual reports. It would, however, be a mistake to define these interests too narrowly or to try to encapsulate them into ever more complex accounting rules and audit regulations, set by accountants and interpreted by lawyers. This could detract from the critical importance of judgement in coming to a reliable true and fair audit opinion. Rules were necessary but not sufficient on their own, while providing for comparability and identification of risk.

The public interest covers the different interests of different groups. It should operate at a high level to drive the behaviours of different economic actors towards serving the interests of the people. Different definitions of the public interest in particular situations should allow for differences of stakeholder interest.

The prime legal responsibility to produce true & fair financial reports rests on the directors of companies. This indicates the importance of well-functioning audit committees.

A reliable audit opinion helps those value-investors who are concerned to seek returns from longer term investment policies. Such opinions enhance trust in company reporting and assurance that can reinforce other data concerning trends and future prospects.

Investors would like to know what difference had been made by the audit process. The value of an audit may accrue from the challenges that auditors make to management during an audit and their independence (meaning objective rather than separate) is paramount. It is for consideration whether the context and nature of such challenges should be revealed publicly and, if so, in what degree of detail. There is scope for the profession to use the experience of extended auditor reporting to innovate further.

It is in the public interest to encourage provision of independent audit and assurance services, and to avoid squeezing audit and assurance services by imposing costly regulations that would discourage both provision and demand. Exit of an audit firm, even a large one may not be a problem if other firms expanded their activities, provided that this did not increase market concentration.

The context of accounting rules is often neglected. It is desirable to strengthen the role of principles designed to take full account of the wider shareholder interest. This would include ethical issues and the importance of uncovering fraud. Incentives to honesty and good stewardship would help to achieve good investment results.

Annual reports should not be overwhelmed with ever more information, but should focus on ensuring that they provide a true and fair view of the financial position and results of the company at a point in time. Consideration could be given as to what information could be excluded from the annual report and made available to users separately eg through an entity’s website. Audit should provide the necessary assurance for owners and investors.

People have lost sight of the objectives of audit and have concentrated too heavily on ticking rule-based boxes. Regulators should encourage improvement by focusing on high level principles to drive the required behavioural and quality outcomes and avoid detailed prescription, taking full account of proportionality.

Guidance on the relevant principles must be proportionate to different situations, including market positions. These principles should focus round the public interest and the creation of expectations. Audit should be seen as the protection of integrity. 

It was germane, and timely, to have a debate about these issues, as, following the recommendations of the Competition & Markets Authority (CMA), the rotation and tendering process is now under way.