“So tell me what you want – what you really really want.”
-- Spice Girls, 1996
“But if you try sometimes, you just might find, you get what you need.”
-- Rolling Stones, 1969
Insiders within the accounting community are falling all over themselves in congratulatory admiration of the Independent Auditor’s Report signed in London on February 12, 2014, by Senior Statutory Auditor Jimmy Daboo on behalf of KPMG, on the financial statements of Rolls-Royce Holdings plc.
Running to six full pages starting at page 130 of the company’s 2013 annual report, single-spaced and double-columned, Daboo’s opinion implements with a vengeance the guidance published in June 2013 by the United Kingdom’s Financial Reporting Council, requiring auditors’ reports to describe the greatest risks to material misstatements, explain their application of materiality in audit planning and performance, and summarize their audit scope as responsive to the assessed misstatement risks.
This is not about motor cars. Rolls-Royce ranks number 28 on the FTSE 100 list of large UK companies, with £ 15.5 billion in 2013 revenue from its gas turbine and reciprocating engine sales to the civil and defense aeronautics sectors, along with marine, energy and power systems -- all spelled out in its report running a handsome 144 pages.
The interesting question is whether the world was really waiting for essays of 500-word-length on such eye-crossingly complicated topics as revenue and profit measurement, measurement of liabilities from sales financing arrangements, or the concept and presentation of non-standard “underlying” profit on foreign transactions. Or would information users have preferred the traditional, simple and comfortable anodyne opinion in the first paragraph, that a “true and fair view” was presented?
Early indications -- based on the conspicuous silence of the investor community and commentators outside the precincts of those with self-interest -- significantly suggest the latter. To be sure, the company’s stock was pounded by its largest price drop in thirteen years with the profit warning of its February 13 announcement of 2013 results, largely since recovered, but blame was placed on forecasted reductions in defense-related revenues, and the financial press made no connection with KPMG’s opinion, either then or since.
If proved out over the rest of the annual reporting cycle for UK companies and their own broad adoption of the FRC’s requirements, the investor community’s “ho-hum” would implicate the long-running efforts to re-engineer the standard auditors’ report – by both the PCAOB in the US and the IAASB globally.
Not, as can be observed, that either of these bodies is proposing changes on the scale of the KPMG treatise – but have rather confined themselves to the identification of the kind of “critical” or “key” audit matters that may predictably elicit generic box ticking and boilerplate, rather than KPMG’s sophisticated mini-seminars delivered on Rolls-Royce.
Which would be unfortunate indeed, especially in the litigation-prone United States, the jurisdiction most likely among the world’s major large economies to inflict a death-blow jury verdict for an auditor’s “getting it wrong.” There, under the disclosure-based policies of the American securities laws, adoption of the emerging UK protocols for actually quantifying audit and reporting materiality, and for explicating the range and uncertainty of complex company decisions and judgments, would go far to draw the teeth of the beast lurking in the courthouse.
For this, those arguing for a sustainable model for privately-provided assurance could only be grateful.
But there being no sign as yet of any leadership or initiative in that direction, grounds for optimism are hard to come by.
Curious readers in the US are invited to have a look at the Rolls-Royce report including the KPMG opinion, and send in their reactions. Readers in the UK – especially actual or potential investors in Rolls-Royce, on whom the KPMG report may have made an impact or had any influence -- are invited to identify themselves and share their thoughts.
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