Monthly Archives: November 2016

Archived Posts

November 29, 2016 by: James Bone Categories: Risk Management KPMG: Harnessing the Power of Cognitive Technology to Transform Audit

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Our [KPMG] work as audit professionals is fundamentally about “trust.” For the capital markets to operate effectively and to the benefit of investors and society more broadly, there must be integrity and confidence in the system. In serving the capital markets and the public interest, we work to help instill trust and confidence in the information used to make important decisions.
In the following pages, we begin to explore how we can continue to promote trust during a time of profound change across the business landscape. Given the explosion of data and the digitization of our lives, we want to promote a discussion about how the audit profession must evolve its tools and approach to keep up with the pace of change and remain relevant in a dynamic marketplace. Specifically, our profession must embrace the use of advanced technologies, including data and analytics (D&A), robotics, automation and cognitive intelligence, to manage processes, support planning and inform decision making. At KPMG we are constantly thinking about the development of innovative capabilities and technologies that will enhance quality and strengthen the relevance of our audit into the future.

November 27, 2016 by: James Bone Categories: Risk Management Commonsense Principles of Corporate Governance

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Open Letter: Commonsense Principles of Corporate Governance

For more than two centuries, the American free enterprise system has led to enormous prosperity for our country: the creation of jobs, increases in wages and savings, and the emergence and growth of dynamic companies. Because well-managed and well-governed businesses are the engine of our economy, good corporate governance must be more than just a catch phrase or fad. It’s an imperative – especially when it comes to our publicly owned companies. Though they account for only 5,000 of our country’s 28 million businesses, our public companies are responsible for one-third of all private sector employment and one-half of all business capital spending, both of which ultimately drive the productivity and health of the country. To ensure their continued strength – to maintain our global competitiveness and to provide opportunities for all Americans – we think it essential that our public companies take a long-term approach to the management and governance of their business (the sort of approach you’d take if you owned 100% of a company).

While most everyone agrees that we need good corporate governance, there has been wide disagreement on what that actually means. So we gathered a small group of executives to see if we could reach some consensus on what we think works in the real world. This group included the CEO of several major asset managers, one activist investor and one public pension plan, as well as several publicly owned companies. We did not convene a group of this size to be exclusive but, rather, so we could sit around a room and have a mature conversation about this important topic – something that would have been very difficult to do in a much larger forum. Indeed, even among our small group, we don’t agree on absolutely everything. But we do agree that, taken as a whole, these principles are conducive to good corporate governance, healthy public companies and the continued strength of our public markets. Thus, we are steadfast in our determination not to let our minor differences imperil this important effort.
The principles set forth a number of commonsense recommendations and guidelines about the roles and responsibilities of boards, companies and shareholders. We firmly believe that empowered boards and shareholders, both providing meaningful oversight, are critical to the long-term success of public companies. But knowing that there is significant variability among the thousands of such companies and understanding that both context and circumstance matter, we have tried not to be overly prescriptive in how to achieve those goals. We also recognize that we live in a dynamic, fast-changing world – and that while many of these principles are and should be part of the corporate governance permanent landscape, some will inevitably change over time.
These principles are not intended to be for or against activists, proxy advisors or special interest groups. While we know that not everyone will agree with everything in them, we hope that, at the very least, these principles will serve as a catalyst for thoughtful discussion. More than 90 million Americans own our public companies through their investments in mutual funds, and millions more do so through their participation in corporate, public and union pension plans. These owners include veterans, retirees, teachers, nurses, firemen, and city, state and federal workers. We owe it to all of them – and to all our shareholders and investors who have entrusted us with their savings – to get this right.

 

November 21, 2016 by: James Bone Categories: Risk Management The Future of Audit by Arnold Schilder, IAASB Chairman

stock-photo-13215386-business-people-in-hong-kong“In a rapidly changing world, audit does have a future.” That is how the report from Grant Thornton and ACCA sets the tone.

The title of this conference does not have a question mark at the end. Rightly so. I was attracted to this profession in 1971 by a Dutch report, called The auditor, Tomorrow? Yes, with a question mark—but one full of hope and perspectives. And earlier this year the Fédération des Experts Comptables Européens (Federation of European Accountants, or FEE) published a report with this promising quote: “The challenges that lie ahead for the profession go along with plenty of opportunities to further evolve and better serve new markets’ needs.”

To me, challenges and opportunities are two sides of the same future-of-audit coin. I would like to put four coins on the table today—each with its own sets of challenges and opportunities.

1. Understanding the business of the auditee, its corporate defense, and value preservation is a cornerstone of a robust audit.

The importance of the auditor’s understanding of the business was emphasized by many who commented on the IAASB’s Invitation to Comment (ITC), Enhancing Audit Quality in the Public Interest. It sounds like an open door. But it was mentioned so often with a twofold background. First, the rapidly changing world that all businesses are part of. Several panelists in the next discussion will elaborate on that. Second, a concern that audits have become a “check-the-box” exercise. Standards and rules can be good guides—but the real journey cannot be predicted. You have to find out yourselves. That is the essence of auditing—your professionalism and independence.

This understanding of the business includes how the auditee has organized its value preservation, and its corporate defense around that. I quote these concepts from a recent book by Sean Lyons that fascinated me. I don’t have the time to elaborate on this, but if I just mention the eight components of the “corporate defense umbrella,” the importance is clear: governance, risk, compliance, intelligence, security, resilience, controls, and assurance. Just one quote to illustrate: “Each organization is required to focus on bringing the dollar in through the front door (offense) while also focusing on preventing the dollar from leaving through the back door (defense).”

This certainly is a great challenge as well as an equal opportunity for assurance providers. This brings me to the next coin.

2. Professional skepticism and professional judgment are key inputs to audit quality. Professional skepticism, as a state of mind and attitude, should govern the performance of auditors (see ITC p. 12).

Professional skepticism is a fundamental concept and core to a high quality audit. The IAASB received many comments on this topic of the ITC (all comments are publically available on the IAASB website). Let me quote a few from one of our agenda papers—they illustrate both challenges and opportunities:

  • Professional skepticism is about the appropriate mindset of the auditor. It is relevant throughout the entire audit.
  • A sufficient knowledge of the business enables the auditor to ask probing questions, more effectively challenge management, and identify when evidence is contradictory.
  • Professional skepticism is about behavior—how can auditors be encouraged to act as critical challengers? And how can quality control at the engagement level stimulate this, such as putting together a team with the right skills, expertise, and experience?
  • Training and education is important to infuse a professionally skeptical attitude into the DNA of auditors.
  • There is a strong link between professional skepticism and the role of the “tone at the top” and the “tone at the middle.”

Each of us can, and should, stimulate this professional behavior. It is difficult enough!

3. Audits are not dying yet, but they do need to adapt to the digital age.”

And now the third coin. This quote from the Grant Thornton-ACCA report says it all. And let me add another one from a book by Rob Nixon: “Industries all over the world are being disrupted by technological advancements, social change and innovative thinking.” So the scene is set. The impact of new technologies including data analytics on both businesses and audits can only be underestimated. The IAASB recently published a paper, Exploring the Growing Use of Technology in the Audit, with a Focus on Data Analytics. The link between these new innovative technologies and understanding the business with all its ongoing changes is obvious. But equally important is the impact on new audit practices and methodologies. Obviously our standards were not, and could not be, written with tomorrow’s technological challenges and opportunities in mind. But the use of data analytics in the audit can lead to 1) better informed risk assessments, through understanding the business of the auditee and 2) more available evidence to support professionally skeptical behavior.

It is important that we pursue this area with great intensity and an open mind. A constructive dialogue between businesses, auditors, regulators, and standard setters is a must to make effective and efficient progress. So please send us your comments on this paper and advise us about the best way forward.

4. The new auditor reporting with key audit matters cannot be encouraged enough. It innovates the audit by clearly speaking out to users. And it provides a link to wider forms of assurance on emerging external reporting, including integrated reporting.

This brings us to the fourth and final coin and so let me conclude with my favorite topic: the innovation in auditor reporting. For many decades external users of financial statements and the attached independent auditor’s report received only one sentence from the auditor, the audit opinion. A binary pass or fail. That is now changing completely. Auditors will now provide a number of observations on key matters in the audit that are most relevant to users, in a very readable way. We know from surveys in early adoption countries, notably the United Kingdom, how much this is valued by these users. There are even investor awards for the most innovative and most insightful auditor’s reports. This new more informative and relevant reporting by the auditor helps clarify the public’s perception of what an audit is. It also stimulates professional dialogues between the company, its investors, auditors, and regulators.

It is vital that we continue to stimulate highly relevant auditor reporting. At the IAASB we have a special auditor reporting implementation support group. But all of us have a role to play here.

The new auditor’s report will also have an impact on other forms of assurance reporting. There are many interesting developments in external reporting and providing assurance thereon. Integrated reporting is a well-known example. The IAASB published a discussion paper in September 2016 on this subject, and we have recently extended the deadline for comments to February 3, 2017 so we invite you to please send us your feedback.

Nov 16, 2016
at ACCA-Grant Thornton Future of Audit Conference
Brussels, Belgium

Related Resources

November 19, 2016 by: James Bone Categories: Risk Management A New Model for SEC Enforcement: Producing Bold and Unrelenting Results

The U.S. Securities and Exchange Commission (SEC) seal is displayed outside headquarters in Washington, D.C., U.S., on Wednesday, Oct. 26, 2011. The SEC approved a rule requiring hedge funds and private-equity funds to reveal internal information to U.S. regulators. Photographer: Andrew Harrer/Bloomberg via Getty Images

The U.S. Securities and Exchange Commission (SEC) seal is displayed outside headquarters in Washington, D.C., U.S., on Wednesday, Oct. 26, 2011. The SEC approved a rule requiring hedge funds and private-equity funds to reveal internal information to U.S. regulators. Photographer: Andrew Harrer/Bloomberg via Getty Images

 

 

 

 

 

 

 

 

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Mary Jo White is resigning from the Securities and Exchange Commission as the new administration has made clear that SEC legislation is a target.  This speech by the head of the Commission appears to highlight Ms. White’s accomplishments and initiatives to fight white collar crime.

November 15, 2016 by: James Bone Categories: Risk Management McKinsey on Risk

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robotsMcKinsey has tackled a number of risk topics in this collection and has published its works on subjects ranging from the future of bank risk management to compliance, cyberrisk, insurance, new technology and Europe’s new risk-based supervisory playbook.  The piece is interesting and provocative with predictions into future as far out as 2025.  McKinsey takes a bold look at the dynamics changing risk management and presents risk managers with challenges to adapt or become overwhelmed by them.