Investors wary of internal audits: PwC

Auditors and their supporting committees need to do more than perform detailed company reviews.

In recent years, they’ve only been producing longer, more complex reports that don’t benefit investors, said Bill McFarland, CEO and senior partner of PwC Canada, at a recent Economic Club luncheon in Toronto.

He adds shareholders and execs are looking for quality rather than quantity when it comes to auditor reports. In particular, they’d like more instruction on what elements of the reports are most enlightening, as well as on how findings will specifically impact company policies, practices and earnings.

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“They want more detail on relevant business risks, companies’ business operations and on non-financial information,” which can include a summary of a company’s policies, social responsibility initiatives, and performance reporting procedures, he says.

They would also prefer less jargon, as well as more information on the cost analysis of reforms.

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In light of recent financial business scandals, McFarland also says shareholders are demanding that audit committees be more transparent; they want to know more about the roles and responsibilities of all members.

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The main reason? Many investors are worried independent auditors are biased since the majority have worked in the industry for many years. If they’re too familiar with a company and its employees, they could less stringent on requirements.

In PwC’s eighth annual survey of the internal audit profession, called Aligning Internal Audit, it found the majority of those surveyed would be more likely invest in a company if they could better understand how to incorporate auditors’ findings in the investment process.

For the first time, the list of survey participants was composed of not only chief audit executives, but also audit committee chairs, board members and top company execs. They were asked their views on critical business risks and the role they expect internal audit to play going forward.

The survey finds they’re most concerned about the following: fraud and ethics; mergers and acquisitions; new product launches; and business succession.

To support enhanced audits, they ask that better training programs for young execs be implemented, since the audit industry will be key to upholding reliable and strong capital markets as the economy improves.

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McFarland also mentioned that the Canadian Public Accountability Board and the Canadian Institute of Chartered Accountants have launched an initiative to enhance audit quality in Canada. It was designed to give Canadians the chance to comment on audit reforms, as well as on how international trends might impact Canada.

In a recent article for the Financial Post, securities lawyer and former OSC chair David Brown said, “Auditors escaped initial scrutiny following the financial crisis of 2008, but it was inevitable that regulators would eventually start to wonder why.”

Brown adds, “It makes sense that the audit be considered within the context of financial system reviews. The audit is intended to enhance confidence in an entity’s financial statements,” and is used by investor and lenders to make investment decisions.

On the topic of reforms, McFarland says long-term solutions are more effective than “knee-jerk, reactionary amendments.” Since not all businesses are alike, he also says internal audit committees should be free make crucial governance decisions independently.

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