Spotlight on the Audit Committee report
In the wake of significant corporate scandals, including the collapse of BHS and Conviviality, and questions being asked about the veracity of the auditing process, the FRC Lab published its Audit & Assurance Lab Project in December. It continues to have significant impact today.
Audit Committee reports are hugely valuable in building investor confidence and reflecting how a company is operating in the best interests of shareholders. Yet many companies fail to fully exploit their Audit Committee report and risk being seen as less viable over the longer term.
Companies have to make sure they maintain clarity, have an understanding of what investors expect from the Audit Committee report and provide detailed reports reflective of business performance. This all starts with understanding the fundamentals of the report, as outlined here.
What is the purpose of the Audit Committee?
The Audit Committee is a central component of effective governance. Its roles include monitoring the integrity of financial statements and other financial announcements; reviewing the company’s internal financial controls and, in some cases, risk management and internal controls; and ensuring the independence and effectiveness of the audit process. The appointment of, and engagement policy with, the external auditor also fall within the remit of the Audit Committee.
Why does a good Audit Committee report matter?
The Audit Committee is the custodian of many diverse facets of a business. This makes the clarity of its reporting key to investor understanding. Companies that provide insufficient or overly complicated Audit Committee reports can appear to be trying to mislead investors or attempting to disguise sub-optimal results.
In today’s climate, effective reporting is closely related to long-term value creation. High profile examples of businesses imploding, Carillion potentially the most significant, have led to heightened interest in the auditing process. Companies which provide robust Audit Committee reports are likely to benefit from increased investor confidence, greater levels of trust and may gain competitive advantage over competitors who obfuscate.
At Luminous, we measure company reports against our own best practice guidelines. Areas that could be improved in the typical Audit Committee report include:
- Disclosure regarding the external auditor
– Investors are keen to understand the Audit Committee’s plans for tendering; how the quality of the audit is judged; and how a company guarantees independence and objectivity
– Investors expect the Audit Committees to provide insight into its assessment of the effectiveness of the external audit process
2. Reporting on significant issues. Investors want the following:
– Disclosures that provide context and quantification
– A description of the actions the Audit Committee has taken during the year
– The Audit Committee’s conclusion and the underlying reasons behind it
– Relevant cross-references within the Audit Committee report to enhance context.
3. Internal control, risk management systems and internal audit
– Investors seek clarity on the role of the Audit Committee, plus cross-references to where issues are covered in more detail in other sections of the annual report
The Luminous view
Too few companies are providing high quality disclosures and too many Audit Committee reports are overlong, vague and contain superfluous information. Audit Committee reports need to describe more clearly what has been taken into consideration throughout the year and the significant matters that may impact the business.
A system of high quality auditing provides checks and balance against business actions that may not be in the best interests of the public and shareholders. Investor confidence can be improved through disclosures that are honest, balanced and transparent. To get the most out of an Audit Committee report, engagement is key. Discovering what investors are looking for and satisfying their curiosity is a useful way of building confidence and contributing to your business’s long-term survival.
If you would like to discuss how to get more out of your company’s Audit Committee report, please get in touch at [email protected].
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