Whilst introducing greater complexity for organisations and the auditing profession, the advent of the King IV Report on Corporate Governance provides an ideal opportunity for creativity and innovation - not usually synonymous with accountants in particular. The latest iteration of the guidelines on how companies are expected to conduct themselves places a far greater emphasis on asking companies to approach running their businesses from an integrated thinking perspective, rather than ticking off actions to demonstrate compliance.
This therefore holds the potential to blur lines that may have been more clear-cut under the King III principles that had focused quite heavily on demonstrating compliance.
“While public companies would undoubtedly be able to adapt to this new environment, as they have the resources to implement the King IV recommendations, the question of cultural change within organisations is probably the bigger challenge,” says Loshni Naidoo, Director of sustainability and integrated reporting at Grant Thornton. “The changes also pose a challenge to the role of audit firms that have traditionally restricted the scope of their work only to the accuracy of financial statements. What is clear from King IV is that an organisation’s credibility and integrity no longer hinge solely on the financial reports.”
This strengthening in focus is a point that has emerged from a series of global discussions facilitated by Grant Thornton and the Association of Chartered Certified Accountants (ACCA) to explore the future of the auditing profession.
The Future of Audit report, which was compiled from the insights of roundtables hosted by Grant Thornton and ACCA in seven countries, highlights that changes from around the globe place far greater emphasis on contextual information and disclosures, especially on non-financial information, as is the case with King IV.
One of the consequences for the profession, Naidoo says, is that audit teams will need more diverse skillsets to meet this emphasised demand.
“Audits - both financial and non-financial in nature - have traditionally always been backward looking, focusing on a relatively limited view of sometimes isolated aspects of the business itself. As a result, they may miss out on seeing the big picture. And with King IV now also requiring audits of non-financial information to be wider in nature, poses a challenge if this is done without addressing the skills and experience that the audit teams currently possess,” she says.
Grant Thornton and ACCA’s Future of Audit report also emphasises that users of annual reports are looking for forward-looking information and that they require assurance that this information is accurate. King IV appears to align itself to this view with one of the recommended practices asking that the audit committee consider the assurance requirements of future-orientated non-financial information.
This change in skills applies equally to audit firms’ clients, who will need to adapt to understanding the implications of applying the principles, and not merely focusing on ticking a box to indicate they complied.
“This presents the audit profession with an amazing opportunity to innovate - working together with the standard-setting bodies to develop the appropriate standards for auditing integrated reports that not just tick the ‘audit box’, but add value to the businesses; and bringing diverse teams together with the ability to support an ‘integrated think’ approach to audits so that teams don’t get lost in the detail and miss the big picture.”
The risk and opportunity committee proposed in King IV is one such example that should find ready acceptance within all organisations. Naidoo says introducing the business opportunities into the governance framework makes this activity more visible for the organisation that could lead to more opportunities for growth.
The Future of Audit report also highlights that an audit can no longer be ‘one size fits all’. Users are saying although a quality audit is required, it must not place any additional burdens on smaller companies. King IV understands this dilemma all too well. They have heard that smaller companies and the public sector have many challenges and imperatives and as such has set out guidelines for local government and state-owned entities, non-profit organisations, retirement funds, and small and medium enterprises.
“This presents an ideal opportunity for the audit profession to take a leaf out of the King IV playbook, to engage with these smaller companies to understand how best to provide real value-adding audit in a cost-effective manner without compromising quality, ” Naidoo says.
According to the Institute of Directors Southern Africa (IODSA), it is expected that the new King IV Report will only be completed in the second half of 2016. Providing for a two year period in respect of the drafting process and another year grace period to allow organisations to implement, King IV is expected to become effective from approximately the middle of 2017.