Rolls-Royce — the jet engine maker, not the car
company — used estimates and assumptions in its financial results that resulted
in “mildly cautious profit recognition” in an important part of its business.
On the other hand, the company was “mildly optimistic” in other assumptions,
“resulting in a somewhat lower liability being recorded than might otherwise
have been the case.”
Coming from almost anyone else, such observations might not be
particularly notable. But those comments came from Jimmy Daboo, the lead audit
partner on the Rolls-Royce account at KPMG, and are included in the company’s
new annual report.
Until now, auditors’ letters have been among the least
interesting parts of annual reports. If the opinions said the accounting was
proper — and virtually all did — and did not voice concern about whether a
company could stay in business, the letters were basically the same. There was
no reason for an investor to read them.
In the United States, that is still the case.
But in Britain, there are new
rules this year. Auditors are supposed to comment on the particular risks that
companies face and to say what they did to deal with those risks.
They are supposed to discuss how much of the company they
actually audited, to disclose what figure they deemed to be the lower limit for
materiality, and to explain how they arrived at that number.
“Audit reports were seldom read,” said Marek Grabowski, the
director of audit policy for Britain’s Financial
Reporting Council, which required the new reports. “It is evident that
investors are now reading them with interest.”
The sad reality has been that
investors in the past have had virtually no way to assess the relative merits
of any accounting firm relative to the others, at least among the Big Four
firms that dominate the auditing market for large companies.
“Many people see the audit as a
commodity that can be produced equally well by any team from any firm with a
recognized name,” James R. Doty, the chairman of the Public Company Accounting Oversight
Board in the United States, said
in a speech last week at Baruch College. The board is considering proposals to
require auditors to make disclosures somewhat similar to those in Britain. It
has faced opposition from auditing firms and companies.
And they could also open the way
for investors to assess different partners of the leading firms. In Britain,
but not in the United States, the names of the lead partners have been
disclosed in the past, but at most that could serve as a negative indicator: If
an audit blew up because of undiscovered fraud, that reflected badly on the lead
auditor. But unless and until that happened, an outsider had no way to assess
what the auditor actually did. Investors certainly had no way to form a
positive opinion of a particular auditor
“It holds them to account more,” Mr. Grabowski said. “It should give
the individual partner a chance to show they are doing a good job.”
Click here for the full article in the New York
Times.