Can greater transparency of the audit committees role & responsibilities increase investor confidence?

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By Tomas Muller – Tomas.Muller@EthicalBoardroom.com Investors and stakeholders in various companies and organisations, across all industries and of all sizes, are increasingly calling for improved audit committee reporting. In particular sentiment has been moving in the direction of bespoke and customised methods of audit reporting. Understandably, the relevant parties are arguing that investors can only regain confidence in the global capital markets of today if they can trust the financial statements reported by publicly traded companies.  Investors are looking for more signs of security as compared to the period prior to the credit crisis and investor beliefs are inevitably centred on the perspective that information provided by market participants should be complete, accurate and reliable. Audit committees and accountants are fundamental to qualifying this data and providing validity to the reported information. Therefore it is essential for market activity to prosper that investors are able to trust public company auditors and consequently audit committees. Investors need to be able to trust that audit committee members are both relevantly knowledgeable and experienced. Investors also need to know that audit committee members are operating in an independent manner and that they possess the upmost levels of integrity. Being provided with the right information would allow investors to engage, discuss and contribute towards audit issues and shortfalls – improving efficiency, understanding and all round market confidence.  Research into this area has additionally found that investors want audit committee reporting to be tailored, bespoke and more company specific. In addition they would feel more confident if the information provided was timely and directly relevant to the company activity over the most current year. Investors are also agreed that a more comprehensive provision of information on audit committee decisions and actions, particularly as related to financial statement issues could specifically aid them in developing better views and investment valuations. The key point of this argument, however, is that relevant, material information should be provided to boost investor confidence. Masses of immaterial information and data will not have anywhere near as much beneficial impact as a small amount of bespoke, relevant information. Investors want information related to real company issues and decision making.   Corporate governance groups and specialists have outlined certain recommendations to allow audit committee chairs to become more accountable – for example by personalising their reports and describing in detail the decisions and actions taken rather than just the purposes they have been set up for. This should foster an attitude of increased accountability and this will lead to improved confidence. It has been suggested that the chair should also describe their specific activities during the year with their commensurate reasons in a clear and straightforward manner. In addition it has been suggested that audit chairs should disclose their judgements for the year, and the sources and systems of assurance and evidence they have chosen to use to satisfy themselves as to the appropriateness of the conclusion. Investors have expressed that they would be more likely to pay more attention to audit committee reports if they provided more relevant and meaningful information. Further to this audit committee reports should be made a central part of the discussions between companies and investors in a move towards building confidence in this crucial area of governance.  The audit committee holds the primary responsibility for auditor selection, reappointment and replacement. However, currently only the minority of audit committee reports include details about the effectiveness and success of external auditors and how this may have been assessed. Shareholders are currently receiving unclear and inconsistent information, with very little explanation as to how audit work is being tendered for. The audit committee is tasked with being a guardian of trust for organisations. It is widely accepted that there has been a diminishing of this trust in corporate governance following the credit crisis, and this makes it essential that audit committee reporting takes steps to move towards better practice and increased transparency through improved disclosure.   Audit committee reporting has been improving over the last few years but further improvements will be pivotal to boosting investor confidence further.