PwC partner and CommBank auditor Matthew Lunn
The PricewaterhouseCoopers independent auditor’s report covering Commonwealth Bank’s financial statements for the 2019-20 financial year goes for seven pages and every detail is essential to understanding why the firm and its engagement partner on the CBA gig, Matthew Lunn, came to its view.
Anybody that fails to read beyond what is essentially a three-paragraph clean audit opinion fails miserably as a shareholder, journalist or analyst because the auditors lift the bonnet on a range of issues that merit further exploration.
What galls me most as a veteran of looking at this space for 26 years is that people have repeatedly said they look at the audit opinion just to see whether there is anything wrong before going into the rest of the annual report.
This does not mean that the person looking at the audit report goes beyond the opinion and it is in my view dangerous to assume that people will go further without an invitation to descend into something called detail.
PricewaterhouseCoopers and other firms should consider reminding people that the headline statement contained in the audit opinion should be read in the context of what follows. No such prompt exists in the PricewaterhouseCoopers audit opinion that sits at the front end of what is a comprehensive audit report.
There should be a cue at the tail end of the audit report that acts as a prompt, a reinforcement, a reminder that there is more that needs to be understood in relation to the audit and not just the fact that the firm was satisfied that the auditee’s financial statements complied with the mandatory reporting framework in all material respects.
We still exist in a context in which there is a perpetual discussion about an expectation gap, which, let’s face it, is and will remain a gap for infinity.
People with knowledge die and there are those born each day that need to learn. An expectation gap cannot be fixed just by expanding the scope of audit to fit what people think auditors should be doing. It needs to be dealt with also by forcing the reader’s attention on the other elements of the audit.
It is equally useful to remind politicians engaged in looking at audit regulation in the country that the audit has many parts and that the audit is a nuanced service.
Auditors do not provide an assessment of absolute truth. Assertions in the media from some politicians that is what investors expect means there are people in the political class who seek to simplify matters for their own end not necessarily for the benefit of greater understanding about what an audit actually entails.
What would the lazy people miss if they just look at the words up top?
The audit report details the financial statements that were the subject of the audit, the standards and laws that formed the basis for the audit and the full scope of the audit of the bank.
The scope paragraph highlights the fact that the audit engagement team focused on ‘significant accounting estimates’ that involved assumptions and inherently uncertain future events.
This does not just mean the auditors considered issues related to the coronavirus pandemic, however, because there will be other areas of uncertainty during any given period of operations.
COVID-19 and all of the related business issues that arise are transposed on top of the usual issues related to commercial uncertainty that banks and other entities face.
We are seeing different audit firms illustrate processes in their reports to make them more interesting.
CBA’s external auditor does this reasonably well with the outline of the scope of audit and what ultimately leads to the audit opinion. A table that sets out individual components of the group audit and the audit scope of each component provides the analyst, shareholder, journalist or other stakeholder an indication of the level of audit work that is done.
This is not an area that is jargon-proofed, however, and it requires people to build an understanding of the how an audit might be scaled up or down depending on the circumstances.
There is sufficient guidance online on matters related to audit as various academics have recorded numerous videos and lectures that provide some insight.
Most people will be aware that banks have a funky new accounting regime gifted to them by international accounting standard setters and prudential regulators related to estimating credit losses. PricewaterhouseCoopers outlines the work the firm had to do to be satisfied that CBA had done sufficient work on its assumptions in a section related to key audit matters, which runs to four and a half pages on a range of issues.
The first elements of the credit loss crystal ball gazing that were examined dealt with assessments of internal controls related to the review and approval of forward looking information for models detailed expected credit losses, reliability and accuracy of pieces of data and how the various elements of data were then reviewed and approved by the bank’s Loan Loss Provisioning Committee, which gives an acronym laden world LLPC to add to a pot of overflowing alphabet soup.
The firm used a multidisciplinary team that included credit modelling experts and economics to run the ruler over the bank’s assessments.
It is important to note that this kind of assessment takes place within the external audit context because it is a part of the firm’s obligations and, indeed, required of an audit engagement team to properly understand the economic environment in which the audit engagement client operates as well as the norms of the particular industry sector. This is the way in which this audit objective is in part achieved by those involved in reviewing the credit loss estimates made by the CBA.
Key audit matters take a reader into what the audit firms did to satisfy themselves that an entity – in this case CBA – has made reasonable assumptions throughout its financial reporting processes. Anybody failing to browse the detail contained in this section will not understand the basis on which the audit opinion is given.
A further feature of these explanations is that they will point the reader to one or more notes in the financial statements. In other words, the auditors are directing attention back into the financial statements for which the board of directors and managers of the entity are responsible.
The final page of the audit report sets down the areas of responsibility for auditors and entity management so that a reader is left in no doubt that there is a different between auditors and management.
This section is incredibly important as it also reminds people that auditors do not have everything within their line of sight during an audit.
There is also an external reference to a document that sits on the web site of the Auditing and Assurance Standards Board that provides additional information on the conduct of audit, which is one way of trying to get people to read more about the detail of audit processes. It would be interesting for some research to be conducted to see how often that document is read by people who read the CBA financial statements in order to see what degree of curiosity exists within the community.
All of this details the story of an audit and it should prompt further questioning about the placement of the audit opinion at the front end of the report.
All of the ingredients are there for people who could be bothered reading through it. There is no excuse for ignorance but perhaps it is time to push the audit opinion back to the end so that the opinion is the sum of all of the efforts outlined – like a mathematical equation – rather than the headline statement that allows the inattentive browser an opportunity to retreat from material that is critical to the understanding of the audit function.