Shareholder engagement with audit and assurance Shareholder engagement with audit and assurance
Shareholder engagement is a very powerful tool. We’ve certainly been reminded of that in this year’s AGM season, where we’ve seen shareholder votes prompt companies to make radical changes to their strategy, governance and reporting in areas such as climate in the energy and banking sectors, and inclusion and diversity across the whole market.
So, it’s not surprising to see that the proposals in the ongoing government consultation ‘Restoring Trust in Audit and Corporate Governance’ seeks to harness the power of shareholder engagement to drive change.
The BEIS consultation – open for comment until 8 July – is the UK Government’s response to the three independent reviews by Sir John Kingman on the Financial Reporting Council (FRC), Sir Donald Brydon on the quality and effectiveness of audit, and the Competition and Markets Authority on the audit market.
Its proposed measures – which aim to enhance the quality of corporate governance, corporate reporting and audit – include proposals to improve stewardship by giving investors better opportunities to engage with companies, particularly on audit and assurance matters, via two key measures:
- Publication of an Audit and Assurance Policy: a forward-looking statement by the audit committee on a company’s approach to the audit and assurance of its financial and non-financial reporting; and
- Engagement on audit planning: giving shareholders a formal opportunity to share views with the audit committee on the auditor’s annual audit plan.
The Audit and Assurance Policy
The Audit and Assurance Policy – which we covered in depth in a recent podcast – would cover the following areas.
| Mandatory areas | Examples of optional areas |
|---|---|
| Resilience Statement | Alternative performance measures (APMs) |
| Internal controls | Key performance indicators (KPIs) |
| Internal audit function | Environmental, social and governance (ESG) metrics |
| External audit tender | Investor presentations |
Companies would be required to publish a three-year rolling forward-look and the policy would be subject to an advisory shareholder vote. Government are asking if this should be done annually or every three years.
What have investors told us?
This is perhaps the area where we see the widest range of opinions and views. Investors seem to be split into two camps: those who are strongly against and those who see the benefits.
Those who are against this proposal claim that investors do not have the capacity and capability to engage with the hundreds – sometimes thousands – of companies they invest in. They fear that we risk creating a situation where there are consistently high votes in favour with little or no engagement (similar to what is observed on auditor (re-)appointment). Basically, they worry that this process would essentially become a ‘tick-box’ exercise. While they do not see a need for a vote, what they do want is the right to express their views and for those to be acknowledged.
Those who are in favour see this as a way to encourage structured dialogue between companies and their shareholders. These investors often draw parallels with engagement on the remuneration policy with many saying that investors should be much more focused on audit than they are on remuneration. Company-led engagement on audit and assurance would encourage more investor focus on this important area.
However, investors in both camps agree that they would like a defined minimum scope of audit and assurance for listed companies of comparable status, which would allow them to focus their attention on outliers rather than having to engage individually with each company. In their view, this minimum scope (which could be delivered by the external auditor alone or alongside other assurance providers) would include internal controls, APMs, KPIs used in executive remuneration and value-relevant ESG metrics. Some investors also call for mandatory assurance over preliminary announcements and investor presentations.
Their main concern is that diversity in practice among companies over whether assurance is provided in areas outside the financial statements may lead to confusion and lack of consistency in reporting and interpretation, particularly when comparing multiple companies.
Engagement on audit planning
Government proposes that there should be a mechanism for audit committees to gather shareholder views on the audit plan.
Shareholder views would be purely advisory in nature to ensure that the auditor retains the final say over the way the audit is conducted. Although a wide range of risks affecting the company might be of interest to shareholders, the auditor would not be required to consider proposals which fall outside of the scope of the audit. To help maintain auditor independence, the auditor would respond to shareholder feedback via the audit committee.
What have investors told us?
Some have doubts about the value shareholders could bring to audit planning but they welcome the opportunity to provide views and express concerns. The proposals as currently drafted would be led by audit committees – some investors would like to also have access to auditors directly.
Areas where input from investors might be useful include scoping/coverage of jurisdictions that might not be financially material in the current financial statements but are a key valuation driver in investor models based on forecast performance. Shareholder input on concerns with accounting practices, insufficient disclosures or similar would also be beneficial.
While such commenters recognise that institutional investors generally do not attend AGMs and the nature of such meetings would need to be revised to be an effective forum for shareholder engagement, they are very supportive of proposals to require audit partners to answer questions from shareholders at AGMs.
Some would also welcome opportunities to discuss market- or sector-wide audit and assurance themes with auditors on a forward-looking basis, in contrast to the backward-looking approach that AGMs entail.
In their view, more informative and user-friendly audit reports would lead to increased engagement.
