Enhancing audit relevance for investors: Can Canada lead the way in peeling the onion?

To improve the relevance of the audit for investors, should KPIs be subjected to independent assurance in the same way that financial statements are?

Starting a conversation with investors about how to enhance the relevance of audit is like peeling an onion. As you remove layers of misunderstanding about the auditor’s involvement with information investors use in their decision-making, you discover that the core to enhancing the relevance of the audit may have more to do with changing elements of the financial reporting process itself.

Investors see audited financial statements as the foundation of their analysis, but it is only a small percentage of the information they use. They also consider earnings press releases, management’s discussion and analysis (MD&A), analyst calls, investor information packages on websites, etc. And yet, an auditor’s involvement with such information may be very limited. For example, the auditor is not required to provide assurance over the MD&A. The auditor considers whether there is a material inconsistency between the MD&A and the financial statements, and between the MD&A and the auditor’s knowledge obtained in the audit, and reports appropriately. Earnings press releases and most other information investors use do not fall within the scope of any limited auditor involvement.

Boosting the reliability of KPIs: An opportunity?

Does it make sense that investors in today’s world are using broader sources of information to make their decisions and only a few of these sources are derived from information systems subject to independent assurance?

Investors may assume that all information presented by management is of equal quality. But that may not be the case and investors are beginning to notice, particularly with key performance indicators (KPIs). Investors make extensive reference to KPIs – those measures that provide insights into a company’s performance. The MD&A contains a multitude of KPIs, both financial and operational. Investors use them to track how a company is performing from year to year, what its future prospects are and how it is faring against competitors in the same industry.

In today’s complex, fast-paced world, KPIs are critical. They are not, however, subject to audit, not all of them are within the scope of securities regulatory oversight and the audit committee, ostensibly with responsibility for reviewing the MD&A before the company issues it, may not delve deeply enough to truly challenge the relevance, transparency, comparability and consistency of KPIs. If they are not reliable, this is a problem.

Collaborative approach needed on KPIs

Commentators across Canada and the globe have been talking about KPIs and how to strengthen their transparency, consistency and comparability – an area, incidentally, where auditors can lend credibility through independent assurance. I have been scanning the global environment to see whether other jurisdictions have solutions, and whether they involve the auditing profession. What I have found is a lot of discussion of the issue, some picking away at the threads, but no global solutions yet. Why is this? I think the main reason is that enhancing the reliability of KPIs does not lie on the doorstep of any one stakeholder. Not the securities regulators, not audit committees, not auditors. Figuring this out needs a collaborative effort involving investors, industry organizations, professional bodies, standard setters and other policymakers. What better place to see that collaborative effort than in Canada, where we have been successful in the past, as with the enhancing audit quality initiative.

I think there is a golden opportunity for Canada to lead the drive to make KPIs more reliable for investors. Along the way, I think there will be a role for the CPA profession, and auditors can enhance our relevance to these key stakeholders.

Keep the conversation going

Do you agree that there is an opportunity to improve the reliability of KPIs? What do you see as the best way of doing this? Do auditors need to be involved too?

Post a comment below; or email me directly.

Conversations about Audit Quality is designed to create an exchange of ideas on global audit quality developments and issues and their impact in Canada.

About the Author

Eric Turner, CPA, CA

Director, Auditing and Assurance Standards, CPA Canada