Lessons from the crisis

While Indonesia has come better out of the global financial crisis than many other countries — the country’s GDP grew by 6.2 percent in the second quarter of 2010 and foreign investments grew by 46 percent year-on-year — there are lessons to be learned. While the lessons take different shapes in different countries, much can also be learned by looking across country borders. If there is to be a positive legacy of the financial crisis, it must be what market participants are learning from it.

The crisis has put the spotlight on the auditors in several different ways across the globe, and questions asked in one market are likely to result in similar questions being asked in other markets. In the United States there is the Lehman court case, which has asked questions about the role of the auditor. In the European Union, the internal market commissioner, Michel Barnier, has already consulted on corporate governance in financial services, with external audit being one of the areas in focus. Another Green Paper on the role of audit is expected out this autumn. In Singapore, the role of the auditor was recently debated during the regulator’s annual conference, and in the UK both market regulators and politicians are looking into the matter.

Auditors play an important role in financial markets, promoting confidence in financial information provided by banks and other financial institutions and acting as a discipline for directors and management. An auditor goes into a company with the purpose of providing greater confidence in the financial statements prepared by that company’s management and directors in accordance with the appropriate financial reporting standards.

They do this by giving an independent opinion on its truth and fairness. That opinion is reached by gathering evidence to support the financial statements, usually on a sample basis, by examining risk management processes, governance, systems and internal controls, and by challenging management on the assumptions and decisions they have made. Auditors use their professional judgment to reach conclusions and recommendations, which are then reported back to audit committees and senior management. Where there are issues that they believe the users of annual reports need to be made aware of, they will include a statement to this effect.

Independent auditors are not there to assume management roles or to compensate for inadequate in-house finance teams. Ultimately it is the company directors who are responsible for the success or failure of the entities they lead and run.

The role of the auditor has primarily been to ensure that shareholders are provided with information that enables them to hold the directors of the companies they own to account. The quality of audit is paramount and has to remain top priority regardless of market
conditions.

As a result of the crisis, the audit profession has had to think about how the audit model needs to evolve to meet the needs of regulators, investors, management and society as a whole. Over the past 18 months, Insitute of Chartered Accountants in England and Wales (ICAEW) has also been examining how the current audit model needs to evolve. While that initiative has focused primarily on the UK and the financial services sector, it asks some questions that are relevant to other markets and also points at some lessons from which we could all learn.

Among the questions it asks is whether risks could be presented differently to offer better information to investors and other market participants. Do the reports give enough information for investors to understand the big picture, which is often obscured by the volume of detailed information? Summary risk statements are a potential way of meeting this objective, particularly if auditors are able to provide assurance on these statements.

Another question worth discussing is whether enough information is provided about the work that underpins an audit under the current framework.

Due to the nature of the global crisis, focus has been especially on the role of audit in financial services. Questions are asked whether more regular exchange of information between auditors and the bank supervisors will enable both to perform their duties more efficiently and effectively. There are also questions about whether the skills of auditors can be better utilized, beyond the core function of offering an independent view on a company’s financial
reports.

If there is one big lesson from the crisis for auditors, regardless of which country they are based in, it may be that more needs to be done to explain the value of audits to those outside the audit process. Over the coming months, there will undoubtedly be further proposals and discussions on the role of audit both here in Asia and elsewhere in the world. These are important debates to be had to ensure the role of auditors evolves to meet market needs and continues to add value.

The writer is regional director, ICAEW Southeast Asia.