Ian Powell, Accountancy Age, Thursday 15 July 2010 at 09:39:00

The scope of the company audit can and should be widened, but safe harboursare needed for this to happen


Audits are crucial to the proper functioning of the capital markets and themaintenance of confidence in both individual companies and the market as awhole. There is considerable evidence that auditing supports the integrity ofcorporate governance and shareholder stewardship and that in turn reduces thecost of capital.

However, I believe that the current audit model, and wider corporatereporting, is capable of being improved to meet the changing needs of marketparticipants. The fundamental questions revolve around the scope of the audit ?whether this should be extended ? and the nature of the audit report itself.

Independent studies support the view that there is generally a high level ofconfidence in audited financial statements. But these studies also show that themarket often wants more from the audit. There are three areas in particular Iwould like to see debated.

How should auditors communicate what they do?

At present, months of hard work is reduced to a binary opinion expressed in ashort note to the accounts. Much of this is driven by regulatory requirements,but today?s opinion gives very little insight into the nature and impact of theaudit process. Different forms of communication could play an important part.

Who should auditors communicate with?

The profession could have done more to acknowledge that auditors work for andon behalf of the investors who own the company. But there are significantbarriers to communication between auditors and shareholders. I would welcome awider debate on the type of information investors want, whether this could orshould come from the auditors, and if so what the practical and legalimplications are.

What should auditors communicate?

The financial crisis has led many to ask whether auditors should be givengreater flexibility when expressing opinions. For this to happen, theenvironment we operate in also needs to change. Simply asking the audit profession to step outside the box more is not the answer. We need to redefine thebox. This is where the wider reporting model debate is crucial.

The discussion needs to consider widening reporting to include non-financialinformation, and given the importance we now attach to this kind of information,I see value for the market in having assurance over it.

Making this happen will require concerted efforts to overcome a number ofroadblocks. The inherently conservative nature of the profession is one suchobstacle. We need to be prepared to talk more openly about our role, be moretransparent about the difficulties we face and be brave when considering anynecessary changes.

Structural and attitudinal changes are needed to enable auditors to be moreopen. To achieve this will require the creation of safe harbours for directorsand auditors. And finally, any strategy, including in the field of regulation,needs to set out a long-term vision of what it wants to achieve, not just whatit wants to prevent.

The statutory audit model has much to commend it and I believe that buildingon it rather than breaking it apart is the right way forward.

Ian Powell is chairman and senior partner at PwC.