In the midst of all the current debates around the financial statement audit in the past year, we thought that giving a voice to our clients would be an interesting and thought-provoking perspective. As we progressed with our audit mandates in early 2015, we conducted face-to-face interviews with C-suite executives, with a particular focus on public interest entities (PIEs). We inquired about the importance our clients attach to audited financial statements, the importance of the audit process and what, in their opinion, could be included alongside the audit service.
Below, we provide a summary of the more important aspects coming out of our inquiries.
Audited financial statements provide "peace of mind" to our clients and have been described as "the most important publication of a company", though, also in the words of one of our clients," are of little value if companies do not take their preparation seriously and fully own them". These clients, cognisant of their public profile, use audited financial statements to showcase themselves to the outside world and to instil confidence in shareholders and other stakeholders, including their prospective clients. They measure their successes against those of their peers by referring to competitors' audited financial statements.
Our insights into the effectiveness of the entity's internal control environment, both informally and formally through our management letters, have proved to be highly useful and valuable to our clients, mindful of our knowledge on industry best practice through the servicing of other clients. Clients' interest on key areas of risk that concern management, audit committee and investors alike, has highlighted the importance of increased transparency and enhanced auditors' reporting within our audit service, providing broader and more relevant assurance. This of course, would give further ability to those charged with governance to focus on 'what could go wrong' in overseeing the financial reporting process. Notably, some clients have highlighted the importance of not losing sight of the traditional compliance aspect in audit and the auditors' current important role of reporting on the financial statements.
It has transpired that despite having a strong finance function within an organisation, we as auditors, continue to be a sounding board for technical matters to our clients. Coupled with this, they have stressed the importance of regular communication with auditors, communicating and discussing issues as they arise during the audit process, and on a regular basis during the year, as part of the audit relationship. This underpins the importance of thought leadership, providing latest industry updates and technical guidance to our clients.
Our substantive analytical procedures to identify risks and investigate anomalies are well received by our clients and preferred to the traditional checks and balances. They claimed that questions asked by auditors in performing such tests "make them think and sense-check their numbers", also "reconciling the audited figures to those provided by management". Our clients are particularly interested about our findings when we use structured industry benchmarking in predicting and comparing their financial data. Leveraging available information through the power of our Data & Analytics tools not only increases the quality of our audit evidence but also adds value to our clients through a better understanding of the factors affecting performance.
Our clients are suggesting that we should go beyond the compliance aspect of a statutory audit, rendering it into an opportunity to unlock, as it were, the value of our audit process. Whilst this is of great relevance to public interest entities and other medium to large entities, it has been argued that it may be of lesser relevance to smaller non-listed unregulated entities in Malta. The current debate around the statutory audit requirement for all incorporated entities is now taking form and we are to expect developments which would exempt, to some degree, certain companies from such a requirement. Beyond the compelling reason driving that debate, we see this as a means to pave the way to redeploy resources to service the higher end of the spectrum of small enterprises (besides the medium to larger ones and PIEs) for which such an exemption will not apply, providing broader assurance in addition to the traditional binary form of audit reporting.
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