The Importance Of Audit In The Evolving Financial Reporting Ecosystem

The debate about responsible financial reporting has not been sidelined by the COVID-19 pandemic. In fact, the future of audit—and how it should adapt to changing stakeholder demands—has only grown in importance as financial reporting ecosystem participants consider how to deliver reporting that provides the insights for businesses and investors to recover and thrive.

To inform this debate and understand the value placed on financial statement audits, Deloitte Global surveyed 351 C-suite, finance and audit committee executives, investors, shareholders, and board members across nine countries from a broad spectrum of companies. The survey, which was conducted in April/May 2020, at the height of the initial global response to COVID-19, shows that even within the economic turmoil of the pandemic, market participants place great value on audits and the assurance that they provide.

Audit remains essential

The survey results underscore the fact that audit is an integral part of the financial reporting ecosystem, which includes management, boards and those charged with governance, regulators, standard setters, auditors, and investors, each having an important role to play. Ninety-eight percent of respondents agree that an audit of a company’s financial statements allows them to trust and rely on the financial statements to some degree (31% agree completely, 62% agree strongly, 5% agree somewhat).

There continues to be differing views about the perceived scope and purpose of audit. While today’s complex business environment requires the audit to be dynamic, multidimensional, and insightful in order to meet changing needs and expectations, there has been a growing demand for audits to evolve and provide real-time, relevant information, and companies expect audits to keep pace as they innovate their businesses and processes.

Auditing firms are responding to these demands to modernize the audit. These advancements seem to have made an impact, as 94% of respondents said that they are more confident in their financial statement audit process than they were five years ago, with nearly one-third (32%) answering that they are much more confident. Although great progress has been made, with increasing complexity, risk, and expectations, there is still more to do.

Expanding audit

Ninety-two percent of respondents seek a more holistic view of the direction their organization is heading from their audits. When asked which business areas they would like their audit to include in the future, they were equally split among the following areas—corporate culture, sustainability practices, ethical standards and practices, social responsibility practices, corporate purpose, and cyber risk.

When asked specifically about financial statement audits, 95% of those surveyed said that a financial statement audit should provide additional value beyond providing an independent auditor’s report on the historical financial information. These findings suggest that a financial statement audit should inform as well as assure, extending its scope to areas of broader public interest, not solely historic financial statements.

Nearly three-quarters of respondents (73%) believe financial statement audits are designed to provide assurance that any fraud will be detected by the auditors. However, in its current form, an audit is not designed to provide these absolute assurances indicating there is a misunderstanding about what an audit is designed to do. The auditor’s responsibilities in relation to detecting fraud is an area of continued focus in adapting the scope of the audit and requires the constructive, integrated evolution of standards.

Fraud risk is not new, but recent corporate failures have increased the focus. This is emphasizing the responsibilities of management boards, regulators, and auditors. The COVID-19 pandemic has resulted in significant operational and financial pressures on many companies and may have led to changes or weaknesses in their internal controls.

Transparency expectations

Technological disruption, rapid market changes, and recent events have also highlighted the desire for greater transparency and breadth in reporting. A majority (65%) of executives surveyed cited greater visibility and transparency around the process and outcomes of the audit as a way to address these expectations.

Further, we see much greater interest in sustainability by a range of stakeholders. Over the past years, issues such as ESG (environmental, social and governance) performance have moved from being a fringe interest to a key factor in investment decisions.

Auditing firms are actively engaging with policymakers in evolving the scope of the audit—taking a critical look at the auditor’s role within the financial reporting ecosystem and how greater transparency can drive more meaningful financial reporting.

A financial reporting ecosystem fit for the future

As expectations evolve, it is clear that the entire financial reporting ecosystem will need to continue to adapt as an integrated whole. All players across the ecosystem have a collective responsibility to serve the public interest. More forward-looking reporting, covering both financial and non-financial matters, such as climate and ethics, is an important step in this evolution. Ultimately any changes implemented need to drive responsible business behaviors, improve clarity and transparency of relevant reporting, and provide stakeholders with more meaningful information to equip them to take informed decisions.

The auditor is critical, but only one part of the financial reporting ecosystem— continued constructive collaboration is needed to drive further change.

Jean-Marc Mickeler

Jean-Marc Mickeler

Jean-Marc Mickeler is the Deloitte Global Audit & Assurance Business Leader. He started his career at Deloitte in 1994, overseeing the audit of several major international banks. Jean-Marc holds an MSc in Management from Amiens Business School. He is a registered Statutory Auditor and an ACPR registered auditor. Jean-Marc has also served as the Chairman of the Professional Club Control Commission of the DNCG (Professional Football League) since 2017.

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Edspira 172K subscribers Auditing provides credibility to companies’ financial information and is therefore essential to the functioning of capital markets. If you’re thinking of purchasing a business, buying shares of stock in a company, or lending money to a company, you need to know that the numbers in the company’s financial statements are legitimate. Auditors create value by serving as an independent, third party that rigorously examine management’s assertions in the financial statements and let you know whether these assertations can be trusted. If investors and creditors have no way of knowing whether they can trust companies’ financial information, they will be hesitant to invest or lend money to firms – this would cause markets to grind to a halt.

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