The value of audit: views from audit committee chairmen

1 The value of audit : views from audit committee chairmen ContaCt For any queries regarding the content of this report, please contact: Michelle Seth-Langbein Senior Manager, Marketing & Communications ACCA+65 6734 8110 ext 113 Goh Ee Waye Senior Executive, Marketing & Communications ACCA+65 6734 8110 ext 102 ACCA is extremely grateful for the support provided by ACRA, particularly in inviting audit committee chairmen to participate, without which this survey would not have been and ACCA thank the respondents of this survey for providing comprehensive and candid information and views during the interviews. Confidentiality This survey was conducted on a confidential basis. Accordingly, we do not provide information on individual survey responses. The Association of Chartered Certified Accountants, July 2010 About ACRAThe Accounting and Corporate Regulatory Authority (ACRA) is the national regulator of business entities and public accountants in Singapore.

2 ACRA also plays the role of a facilitator for the development of business entities and the public accountancy mission of ACRA is to provide a responsive and trusted regulatory environment for businesses and public accountants. ACRA s role is to achieve synergies between the monitoring of corporate compliance with disclosure requirements and regulation of public accountants performing statutory audit . About ACCAACCA (the Association of Chartered Certified Accountants) is the global body for professional accountants. We aim to offer business -relevant, first-choice qualifications to people of application, ability and ambition around the world who seek a rewarding career in accountancy, finance and management. We support our 140,000 members and 404,000 students throughout their careers, providing services through a network of 83 offices and centres. Our global infrastructure means that exams and support are delivered and reputation and influence developed at a local level, directly benefiting stakeholders wherever they are based, or plan to move to, in pursuit of new career opportunities.

3 Background 1key findings 2terms of Reference 3issues 4 - 8 Conclusion 9 ContentPuRPose of suRveyACCA firmly believes in the value that audit brings to business and the wider economy by instilling trust and confidence in companies financial statements. We also believe that it engenders wider intangible benefits in terms of imposing discipline on companies, deterring fraud and giving comfort to other stakeholders that businesses are going concerns. But we also believe that the profession needs to do more to promote that value particularly at a time of economic some notable recent studies in this area, there has historically been a very limited body of published research on the value of financial statements audits to investors and other stakeholders. ACCA is keen to play its part in providing evidence-based assessment which will contribute to the debate on the future of audit . ACCA has therefore undertaken a series of international research projects that examines the role of audit , current levels of stakeholder satisfaction and the extent to which users of financial statements still rely on the assurance conveyed by audit reports when making decisions.

4 ACCA, in its recent policy paper Restating the value of Audit1 has considered the distinct auditing issues relating to both larger and smaller businesses. This report is intended as a contribution to published research on the value of audit . ACRA, as the national regulator of business entities and public accountants, has an interest in issues relating to the quality and value of external audits and in raising the quality of audit . There is no doubt that the value of audit is intimately connected with its quality. If the quality of an audit is compromised its value is correspondingly diminished. It is almost self-evident that a higher quality service would generate more value to a consumer of that service. To ensure high quality, however, sufficient resources must be directed to the audit by the firm. In the debate over the value of audit , the role of the audit committee has assumed great importance internationally. The UK s business regulator the Financial Reporting Council has published several extensive guidance notes in the last two years: firstly on the formation and role of audit Committees and then on advice for the audit Committees on issues such as going concern and the economic downturn.

5 Other countries in Europe are also now introducing mandatory audit committees for listed companies. And a recent study2 by Maastricht University on the value of audit was based on the views of audit committee members and CFOs in the Netherlands, Germany, France, Belgium and the is also up to speed on developments in this area. The high level audit committee Guidance committee (ACGC) was established by the Monetary Authority of Singapore (MAS), ACRA and the Singapore Exchange Ltd (SGX) in January 2008. Guidance3 issued by the ACGC explained the significant responsibilities and work involved: audit committees play an important role in the governance and oversight of companies. They are central to establishing good internal controls and, as appropriate, risk management systems as well as delivering quality financial reporting and instituting strong processes for the proper review of interested person transactions. The growing complexities of the business environment impose even greater demands on audit committees.

6 All the AC chairmen we had interviewed for this research report recognised the seriousness of the governance responsibilities they 2009, ACRA commissioned the Singapore Management University to carry out A Survey on the Oversight of External Auditors through the Lenses of audit committee Chairmen4. The survey interviewed AC chairmen on the key factors for consideration when deciding on the appointment, reappointment and change of external objective of this report, a follow-up to the 2009 survey, is to inform the current debate by providing contemporary evidence on the value of the audit , against the backdrop of quality, as perceived by chairmen of audit Committees of listed corporations in Singapore (hereafter referred to as AC chairmen or respondents). For this purpose, 17 interviews were survey is concerned with audit in the listed company market and deals with perspectives of participants in that 2 )3 +for+ audit +Committees+in+ A Survey of the Oversight of External Auditors through the lenses of audit committee chairmen , by See Liang FOO, Yang Hoong PANG, Luck Pia NG, Kwong Sin LEONG, ACRA , 08 The external audit is regarded as extremely valuable by AC chairmen , predominantly for the assurance it brings them that the financial statements prepared by management present a true and fair view of the company s financial position and results to its shareholders.

7 They see audit as an essential part in the financial reporting value chain which provides them with comfort that the company s own internal accounting staff, processes and systems are generating reliable information. It therefore assists the AC chairmen to meet their corporate governance responsibilities and statutory duties under the Singapore Companies Act. 2. Almost all AC chairmen were of the opinion that the most important criterion for the selection of the auditor was the engagement partner s expertise and knowledge of the company s industry and business ; and an informed audit team with international reach 3. Overall, AC chairmen indicated that their auditors currently met all their key expectations and had no issues with the quality of audits. Almost all felt that their auditors had a good understanding of the company s business , which allowed them to carry out an effective audit , although one did question whether the full complexities of the business were completely AC chairmen want auditors to be independent and speak their mind.

8 This is where the real value is. audit provides an invaluable independent perspective on the numbers generated by management. Challenging questions from auditors and subsequent responses by management give AC chairmen confidence that the figures are reliable for financial reporting purposes. AC chairmen say the auditor is well-placed to bring to their attention any current or potential problems. 5. Auditors knowledge of new accounting standards and drawing the attention of AC chairmen to the impact these will have on the company s financial statements was seen as very valuable. Given the increasing complexity of Singapore Financial Reporting Standards (FRS), AC chairmen valued this AC chairmen are willing to pay reasonable fees for quality audits, especially those which add value to the corporate governance role to be discharged by the AC chairmen , and keeping them as low as possible was not a principal objective for them. 7.

9 The management letter, in which auditors outline weaknesses in internal controls, was particularly important to AC chairmen , who might not otherwise be informed of these weaknesses. 8. There are important additional intangible benefits generated by the audit . AC chairmen find auditors feedback on areas such as the quality of the management s finance team and the competence and co-operation of staff, particularly those in foreign locations, to be useful. These and other insights would be lost without the external auditors. 9. Liability is a key problem and needs to be addressed. AC chairmen thought auditors had become risk-averse to offering professional views that would be useful to the company but was not required within the scope of the statutory audit nor specifically requested for. This meant that the full potential value of the audit was not being realised. This reflects similar findings from ACCA research in other international Most AC chairmen did not expect auditors to advise them on business strategies and preferred auditors to focus on core assurance services.

10 But they did believe audit firms and the accountancy profession at large had the expertise and skill-sets to potentially provide a range of specialised non- audit services, having regard to applicable independence of large entities will have to work harder as business becomes more complex and international. Analyzing the assumptions underlying the business model as called for by ACCA in Restating the value of audit will be important in this context. With Singapore setting out an agenda to position itself as a regional centre of excellence in accountancy, such developments in the scope of audit would benefit from being addressed: innovation and developments in the provision of audit services, within the overall context of a quality framework as set out by ACRA could do much to establish a leadership position internationally. The range of specialised non- audit services identified by the AC chairmen suggests that audit firms will have the skill-sets to develop their role.