Financial Statement Audit, as well as broader assurance, is a critical piece of the governance puzzle and a fundamental input into the data that drives the investment process.

In the first in our new series of roundtable discussions, ICGN brought together representatives from five audit firms and eleven investment organizations to discuss the hot topics of the moment related to the future of financial audits.

Here is what we heard:

Audit reports are important, but they could be more informative and actionable for investors.

While auditors understand investors can be frustrated with boilerplate or jargon-heavy language, it is important to remember that the primary responsibility to provide material information sits with the company and that standards and regulations will need to change if there is a strong demand from investors for the auditor to share more details.

The investors agreed that audit reports are important and can contain useful information for company analysis and preparing for engagements, particularly following the introduction of Key or Critical Audit Matter disclosures, but felt there were ways that audit reports could continue to improve.

For example, including more information about the areas where there are “shades of grey”, significant judgments, or areas of more complexity in the accounts. So-called “graduated findings”, explaining how conservative or aggressive the auditor thinks management’s judgement calls are, would be helpful.

Including more details about the audit process could also be interesting. Investors want to understand not only the final conclusions, but also the dynamic elements of the audit – what changed as the audit went along and why?

Engaging on audit can be hard, can we find ways to make it more accessible?

Sometimes it feels like there are barriers for both investors and audit committees, as well as audit firms, to engage but we all agreed it is important.

Audit related issues are material to investment decisions, as well as governance evaluations – particularly around things like voting on new auditor appointments, considering quality, independence and overall assessments of management financial controls and the quality of board oversight.

Client confidentiality can also prohibit auditor engagement and one suggestion to overcome this was to organise dialogues which are client agnostic, for example discussing common audit issues faced in a particular sector. Useful discussions can include materiality judgments and understanding differences between companies’ accounting approaches. Finding ways to break through technical jargon and speak in terms related to investment analysis would also be helpful, using more commercial language to help portfolio managers and valuation experts interpret audit reports.

While in some jurisdictions investors can ask questions directly to auditors at Annual General Meetings, this tends not to happen very much in practice and confidentiality restrictions can be a challenge. However, we all agreed that forums like these can be a good start and should continue to develop the communication, trust and understanding between investors and the auditors who work on their behalf.

Fraud: Could the auditors have done more?

“Where were the auditors?” is a common refrain following the exposure of a significant corporate fraud, but it is important to remember that the primary responsibility for oversight of financial control sits with the board of directors. External audit is the third line of defence, so making sure a company has a strong control environment, good internal audit and the right board oversight should be the first steps in fighting fraud.

That said, making sure that you have high quality independent external auditors is an important check on those oversight processes.

So, what do investors want from an audit appointment process? It should be primarily focused on quality. Seeking to appoint just the cheapest auditor is not the right option.

Making sure the auditor has enough time and resource to really “kick the tyres” is key to this third line of defence, so making sure audit committees have set an appropriate scope for the audit and an expectation for sufficient time to be spent is important.

Investors in the room also noted there are times they see things and have concerns about a company’s accounts, so perhaps better two-way dialogue between investors and the audit committee at the planning stage might be an effective way to input investor views and expectations.

Artificial Intelligence (AI):

Opportunities, Risks, and innovations

Increasing use of AI in the audit process brings some clear opportunities.

Improvements to quality, standardisation of processes, analysing big data, independent verification, anomaly and red flag detection, can all be sped up using innovative technology. Analysing new areas of insight for auditors, like short seller reports, analyst reports and social media monitoring can all bring new, fast, and insightful information to auditors to help them assess and respond to risk.

The audit firms in the room all talked about the ways that they are thinking about using technology in their audit processes, but they did note that this comes with challenges as well as opportunities.

Getting the right talent into the audit profession will be important – not only do you need knowledge of new technology, but retention risk can also be higher with deep subject matter experts, like AI specialists.

Similarly, the shape of audit firms is likely to change with less need for junior level manual tasks. How might this impact the future of the accounting profession more broadly?

This is a fast-moving space, and investors are using AI in their own processes too, which might change their interactions with audit reports and audited information.

There is also an awareness of the risks of AI-related cybercrime, like deep fakes and fraud, on the audited entities.

AI-related concerns like black-box processes, risks of data bias, spoofing and fake or hallucinated data are also relevant here. Being able to really explain the process of how AI is being used to add value to the audit, adding to quality and bringing new insights will be important.

Talking about how they are achieving enhancements to quality will be critical for audit firms to build investor trust in their new processes, and therefore in the audited financial statements that are the basis of financial markets.

From an investor perspective, anything that enhances the quality of audit can be a good thing. But there is an understanding that while technology might reduce the number of hours taken to do an audit, it does come with different costs, like cyber security, development, cloud computing power and others.

Investors in the room wondered whether some of the historic measures of audit quality like “number of partner hours” might also need to change in the new AI-powered era?

Sustainability related assurance is on the horizon

While the regulatory landscape is changing quickly around the world, sustainability reporting and associated assurance are advancing at pace.

Understanding the difference between limited and reasonable assurance, what the new audit and assurance reports mean, and how to interpret any modifications is going to be important for investors in the coming months and years.

Investors also want to see information from auditors on how well this crosses over into information in the statutory financial reports: how are long term sustainability-related material impacts reflected in the financial statements? What are the audit processes and findings here?

As this area rapidly evolves, everyone agreed that keeping a clear line of dialogue open is going to be crucial.

So, what’s next?

Audit and assurance issues are core corporate governance matters. They impact investors every day through the quality and reliability of company reported information for our investment processes and engagement and voting activities.

ICGN will continue to actively engage with audit standard setters, regulators, and audit firms to share investor perspectives on the future of audit and to provide opportunities for members to build their understanding and engagement on these issues.

Throughout the year, we will hold more of these auditor investor roundtable discussions alongside ICGN conferences in New York, Milan and London.

If you are an ICGN member and you would like to take part, please e-mail policy@icgn.org for more information.