Investor and Other Stakeholders Working Group.docx

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Investor and Other Stakeholders Working Group

Library of Previous Plenary Sessions

Washington, DC

7-9, April 2014Quotes 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

companysfinancial 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 withoverseeing the external auditorsindependence 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


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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 donthelp 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 in-

house 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 auditorsethics, to maintain audit quality."

Dennis M. Nally

Chairman of PricewaterhouseCoopers International 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 whatis 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.


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"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 publiccompanies.

"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 tailas 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 independentin 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, itsessential that regulators closely examine the process by which audit

committees review the auditorswork 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."

https://www.ifiar.org/Working-Groups/Investor-and-Other-Stakeholders-Working-Group/7-9,-April-

2014-Investor-and-Other-Stakeholders-Wo.aspx

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Investor and Other Stakeholders Working Group.docx