Investor and Other Stakeholders Working Group

Library of Previous Plenary Sessions

Washington, DC
7-9, April 2014
Quotes Summarizing the Panelists' Presentations:
Dr.
Werner
Brandt
Member of the Executive Board and the Chief Financial Officer of SAP AG. Dr. Brandt also is a member of a
number
of
audit
committees,
including
Deutsche
Lufthansa
AG.
In recent decades, financial reporting has experienced numerous changes. Next to the internationalization of
accounting and auditing standards the increased level of regulation of external auditing and enforcement may be
the most significant changes, partly being triggered in response to accounting scandals. These changes have had a
sustained impact on companies governance over financial reporting: The role of the audit committee has been
broadened and strengthened. The interaction between audit committee and external auditor has become
instrumental to a successful financial reporting oversight which itself is essential to uphold the confidence in a
companys financial reporting. The increased complexity of financial reporting requires the audit committee to rely
on the external auditors work more than ever before. At the same time the audit committee is tasked with
overseeing the external auditors independence and audit quality. Following best practice has proven to be the key
to a successful collaboration between audit committee and external auditor. In contrast, extensive overregulation
would likely limit rather than foster such collaboration and consequently impair the effectiveness of financial
reporting oversight.
Linda
de
Beer
Chair of the Consultative Advisory Group of the International Auditing and Assurance Standards Board
(IAASB) and an independent non-executive Director on the boards of three South African listed companies.
"Talking about the inter-relationship and interdependency between investors, audit committees, auditors and audit
regulators,
there
are
ultimately
three
matters
of
importance:
Auditor

Independence

Auditor independence cannot be left in the hand of auditors alone. Audit committees and audit regulators alike have
to ensure that auditors (firms and partners) are independent and not distracted by other interests and relationships
in acting in the best interest of investors and thus the public at large. The business model of the large audit firms
are by design not ideal, but cannot easily be reengineered. Therefore, audit regulators have an important role to
play to set robust rules regarding independence. Audit committees oversight role is pre-approving non-audit
services in terms of a policy. Audit committees should also take charge of approving audit fees, to avoid
management putting undue pressure on auditors to cut fees, which might impact auditor independence and audit
quality.
Audit

Quality

Auditors are the agents of investors, appointed by shareholders and reporting back to shareholders. Similarly, audit
committees should be independent, appointed by shareholders and with a duty to report back to the shareholders on
auditor independence and audit quality. Therefore, audit committees have a key role in enhancing audit quality by
considering the scope of the audit, understanding audit risk areas as well as errors identified and difficulties
experienced by the auditors in performing the audit. To this end the audit committee must have private sessions
with the auditor, without management being present, to fully understand audit challenges and execute its
governance and oversight role effectively. Finally, audit committees need to understand inspection findings by audit
regulators in order to ensure that the audit partner and audit firm can best serve the shareholders. The audit

regulators audit quality contribution is robust audit inspections with appropriate action taken against auditors,
where
needed,
and
communication
thereof.
Communication
Enhancing the auditor reporting standard by reporting entity specific key audit matters as well as disclosing the
name of the audit partner, are significant steps forward in communication by auditors to investors. Audit
committees also have a communication responsibility towards investors regarding auditor independence and related
matters.
Audit regulators have a very important duty to communicate inspection findings to audit committees, to assist them
in executing their duties. Furthermore, a single solution should be sought to deal with global debates around
independence requirements, including audit firm rotation. This means that audit regulators have to be part of the
international auditing standards and ethics standards debates and international standard setting
processes. Furthermore, audit regulators have to use their influence to encourage other regulators to improve the
financial reporting chain, for example by enhancing requirements around audit committee composition and duties."
Fumio
Muraoka
Director and Chairman of the audit committee of Toshiba Corporation and a Member of the International
Financial
Reporting
Standards
(IFRS)
Advisory
Council.
"Among several kind of stakeholders, shareholders pay special attention to the auditor reports and individual
shareholders account for a huge majority, with 99% of the headcount in Japan. This persuades us that we need to
focus more on individual shareholders when we prepare auditor reports. We need to make auditor reports easier,
using
simple
words
that
will
help
individuals
to
get
a
better
understanding.
Global companies issue financial reports with huge number of pages, but the auditor reports are just one page of
sometimes complicated descriptions. One page auditor reports dont help investors making decisions on 'to invest or
not to invest'. We need to remind ourselves again that the auditors clients are investors, neither companies nor
regulators.
We
need
'Substantiality
and
Utilization'
of
auditors
reports.
With globalization, corporate structures are becoming more and more complicated. Both external auditors and inhouse auditors must develop a deep understand of the business characteristics of the company they audit.
Cooperation and good communication between auditors are required to identify defects, injustices or illegality at an
early stage. This is very important, no less than auditors ethics, to maintain audit quality."
Dennis
Chairman

of

M.
PricewaterhouseCoopers

International

Nally
Ltd.

"Recently, the GPPC conducted an informal study of various stakeholders to identify ways to enhance good
governance for overseeing the external audit. Key results from that study were that audit quality could be improved
by closely overseeing the provision of non-audit services to audit clients; ensuring auditor independence; reviewing
what the audit committee reports to investors as a result of the audit; providing more training for the audit
committee members; and enhancing the audit committees direct dialogue with investors.
I also would challenge the IFIAR membership to consider that when asked what is audit quality, everyone in the
room would probably have a very different view. This difference of opinion is a real opportunity where the IFIAR
membership can work together to determine the needs of investors, and create common goals and action plans to
enhance audit quality at the global level."
Don
Nicolaisen
Audit committee Chair of Morgan Stanley and a number of other major issuers. Mr. Nicolaisen is the former
Chief
Accountant
for
the
U.S.
Securities
and
Exchange
Commission.

"Those who regulate the audit profession play a truly critical role. An audit is of greatest value when it has been
carefully planned, appropriately staffed, and executed by professionals who are independent, objectively minded
and willing to challenge information presented. Public perception of the value of audits is also directly affected by
the work and reputation of those who regulate the profession. Investors and other stakeholders want regulators to
establish effective and clear auditing standards, to enforce compliance with such standards, and to discipline those
who
fail
to
comply.
Auditors are expected to perform effective audits, which involve tests of compliance and verification of financial
information and disclosures made by businesses, charitable organizations, governmental agencies and others.
Auditors should not be required to act as financial analysts or otherwise conduct work or issue reports outside their
areas of expertise. To do so may weaken the public's perception of their effectiveness.
As chairman of several audit committees, I want the auditors in each case to be recognized as leaders in their firms,
to acknowledge their accountability to the audit committee, and to realize that the audit committee's primary
responsibly is to shareholders."
Ralph
Whitworth
Founder of Relational Investors LLC, a major asset management firm in the United States, who also serves as
the Chairman of the Hewlett-Packard Board of Directors and is a Director at a number of other public
companies.
"Audit regulators and audit firms must be constantly reminded of the Enron experience, and related scandals, so
that we do not repeat the past. I'm concerned that audit firms, by increasingly diversifying into non-audit corporate
services, are beginning to fall victim to the incentives and dynamics that prevailed in the early 2000s. This will
inevitably lead to a decline in audit quality, and likely already has. These dynamics, and the related decline, need to
be
addressed
at
the
international
level.
To enhance audit quality, audit regulators should ensure that audit firms remain primarily focused on conducting
effective independent audits. IFIAR Members should think of ways to ensure that highly profitable non-audit
activities do not become what wags the auditors tail as audit firms move more and more into these non-audit
services.
To ensure that investors are aware of audit firms non-audit activities, and the consequential threat to auditors'
independence, a required footnote should be included in the audit report indicating the non-audit businesses in
which
the
audit
firm
is
involved.
I also suggest that next to the word independent in the audit report and the clients' annual proxy statement there
be
a
notation,
and
related
footnote,
regarding
the
auditor's
independence.
With respect to the role of audit committees, its essential that regulators closely examine the process by which audit
committees review the auditors work and determine what questions the committees are not, but should be, asking.
Monitoring the independence of the auditor is a critical and continuous obligation of the audit committee and audit
committees in the United States, under the Sarbanes-Oxley Act, are charged with playing an enhanced role in
protecting the interests of investors."

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