Areas for audit to evolve according to PwC paper

Just under a third of investors think that audit is effective at meeting the needs of wider stakeholders, such as employees, customers and suppliers, according to a report by PwC.It spells out a raft of changes the firm intends to make to regain public trust and meet expectations.

In the paper titled ‘The Future of Audit: Perspectives on how the audit could evolve’, the Big Four firm collected insights and opinions from individuals and organisations who have stakes in the effectiveness of audit, including academics, investors, audit committee chairs, CFOs and politicians.

Speaking on the findings of the report, Hemione Hudson, Head of Audit at PwC UK, said: “We aimed to broaden the debate and have listened to a wide range of voices engaged with corporate reporting.

“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.

“Auditing has made a significant contribution to the UK’s economic health over many decades and we want it to continue to contribute to driving growth, trade and prosperity.”

Evolve to regain trust

The audit industry, and particularly the Big Four, are finding themselves under increasing scrutiny after a number of high-profile business failures, such as Carillion, Patisserie Valerie and BHS.

There have been calls for a break-up of the Big Four firms due to the perceived conflict of interests between the audit and non-audit parts of the businesses.

With this viewed by many as an extreme option, firms are looking at ways to address issues in-house and regain public trust that way. PwC’s report comes after an eight-month study which it hopes will address many of the concerns about audit.

“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,” said Hudson.

“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.”

From the report, PwC listed twelve ways in which audit could evolve:

1. Strengthen the clarity and relevance of corporate reporting
2. Enhance the reporting and auditing of a company’s internal controls
3. Develop better engagement between the audit profession, company management, shareholders and other stakeholders
4. 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
5. Provide more insight about the material uncertainties facing a company
6. Consider the need to provide assurance over other forms of risk
7. Reporting and assurance need to expand to cover critical performance measures
8. Provide additional assurance over the companies that need it, without expanding the statutory audit
9. Continue to develop and roll out new technologies to improve the effectiveness of audits
10. Continue to invest in the training, technology and people required to conduct consistently high-quality audit
11. Help stakeholders better understand the risks of fraud
12. Strengthen the culture of challenge

Key Findings

By speaking to various audit stakeholders, there were a number of key findings in the report.

Just 32% of the investors surveyed believed that audit is effective at meeting the needs of wider stakeholders, such as employees, customers and suppliers, and 41% of investors feel audit meets their needs.

This suggests a lack of confidence in audits when it comes to investors and will be a key concern to businesses reading this report looking for investment.

The majority of investors and businesses (72% and 78% respectively) are in favour of more information about a company’s future prospects as well as their future risks and feel this should be a central focus of a statuary audit.

There was also a broad backing to strengthen the quality of reporting and ensuring a company’s internal controls are also in the scope of the audit.

PwC’s key findings from the report:

• Both the investment community (68%) and business leaders (80%) think today’s statutory audit serves the needs of companies, while 41% of the investment community and 68% of the businesses surveyed feel that the audit meets the needs of investors.
• 32% of investors and 52% of businesses believe audit is effective at meeting the needs of wider stakeholders, such as employees, customers and suppliers.
• There is 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% businesses are in favour of more information about a company’s future prospects and risks in the central scope of a statutory audit. The position is less clear cut on issues such as forecasted performance metrics and corporate culture, ethics and behaviour.
• The majority of both groups surveyed don’t feel that going concern needs to be extended beyond 12 months. Where those surveyed felt it should be extended the preference is for two years from the business community and three years from investors.
• 76% of investors and 84% of business leaders believe the use of technology such as AI, automation, data analytics would increase the efficiency with which the audit is performed. While there is a 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.
• 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.