The increasing foreign ownership of UK companies is forcing the UK’s reporting watchdog the FRC rethink the role of audit and market oversight.
Stephen Haddrill, chief executive of the Financial Reporting Council, speaking to senior finance figures this week said that he would canvass opinion on the adequacy of the audit report, whether there needs to be more assurance around risks and if auditors can open dialogue with investors.
“In light of the longer term lessons of the financial crisis,” he said “the FRC believes it is time to review the value of the audit and whether it can be enhanced.”
“Audit is a key part of high quality governance,” he argued, “the auditor sees the company’s approach to risk. The auditor challenges management’s judgement on the financials. The auditor reports to shareholders on whether the company is providing a true and fair view of the business. The investor only sees the tip of the iceberg of work. But nevertheless investors are relying on that work being done.”
Some of the key issues the FRC would like to address are:
- How can a strong alignment between the auditor and the interests of the shareholder be achieved?
- Does the form of the audit report need to be changed to make it more useful?
- Should there be more discussion in the front of the report about risk and the business model and should the auditor provide greater assurance about such matters?
- Can auditors give more help to regulators and avoid conflicts of interest in doing so?
Haddrill noted that investors themselves have less power to challenge because their shareholdings are becoming more and more fragmented. The declining influence of UK shareholders means that