1. 26 SEPTEMBER 2013
BUSINESS
R
ob Mercer’s career in financial markets spans almost
three decades, much of which has been spent working
in the sell side, between broking and research analysis.
He is now Head of Private Wealth Research at Forsyth
Barr and is diversifying into researching a wider set of
investment options for clients.
The International Auditing and Assurance Standards Board’s
(IAASB) Framework for Audit Quality (the Framework) states the
purpose of an audit is to enhance the degree of confidence of intended
users in the financial statements. In the IAASB’s view, a high quality
audit is one in which the audit report can be relied upon.
Mercer says that “overall the market has strong confidence in the
auditing process in New Zealand” which is why emphasis is not
directly placed on the audit report itself. In exploring this underlying
confidence, it is likely to emanate from the regulatory environment,
which will only continue to strengthen with the introduction of the
Financial Markets Authority (FMA) as the audit regulator.
He concurs with the Framework in the respect that, aside from
voting to appoint the auditor, investors do not typically have any
direct influence over the audit process, or detailed insights into the
work performed in the audit and the issues that were identified and
addressed. Frequently, investors are not able to evaluate actual audit
quality; it is only ever perceived in the eyes of the investor.
This is achieved by using the firms’ reputation as a proxy: “If it is a
firm you feel has got a brand that sits in behind it, then typically you
would have more confidence around the audit. The fundamentals are
professionalism and integrity.”
Audit quality –
the role of the
investor
Insights from Rob Mercer,
Head of Private Wealth
Research at Forsyth Barr.
By Zowie Murray CA
An investor would generally only question
the quality of an audit if they had invested
in a business and subsequently discovered
that the information they relied upon was
materially misstated, and has had a significant
influence on the valuation of the business.
Mercer notes: “The listed market in New
Zealand is generally regarded as a credible
list of companies, so the starting point is that
the information is already reliable before
it is audited. You’re really only interested
in information that truly is material, and
those items have to be fairly large to have an
impact.” This goes some way to explaining
why investors start building their models
from the draft unaudited accounts that can
sometimes be provided to the stock exchange
in advance.
In saying that, though, analysts tend to rely
on information gathered from interactions
with the senior management of the company
more than what is in the annual report. “The
chance of finding something in the audit
report that changes your view of what you
already know about the company is quite
low,” Mercer says. He goes on to highlight
that this is one of the real strengths in New

2. 27SEPTEMBER 2013
Zealand: “We have really good direct access
to the CEOs and CFOs because we are a
small market.” Such interactions provide
greater opportunities to enhance the users’
understanding of the financial statements,
which is encouraging. As you get into bigger
markets, analysts deal much more with public
information and investor relation type roles.
The Framework suggests other interactions
which are contributing factors to audit
quality. Prior to the global financial crisis
(GFC), there was a lower level of contact
between investors and auditors. However,
Mercer explains that these interactions have
increased post-GFC.
“Investors are now engaging with
auditors more because they are actually
interested in our view and we are interested
in some of their quality insights.”
Contrary to this, he acknowledges that in
reality investors have little interaction with
audit committees. Again this is an area
which is viewed from a high level only.
“The governance of the listed market tends
to be pretty good: it’s not an area where we
actually put a lot of attention on, unless we
have concerns,” Mercer says.
In his interactions with auditors, it is
apparent to him that the focus on auditors’
professional judgement around subjective
areas is becoming increasingly challenging.
He feels there is a lot more pressure on
the auditor around assessing fair values.
“However, analysts spend a significant amount
of time unwinding it because we are interested
in what the ‘true’ returning capital is on the
moneythathasbeeninvestedbythatcompany.”
So an unintended consequence of the
financial reporting standards is the creation of
an identity issue around who should perform
the role of determining the “value”.
The GFC has also prompted users,
in particular institutional investors and
financial analysts, to want to know more
about individual audits and to gain further
insights into the audited entity and its
financial statements. This is the motivation
for auditor reporting being the IAASB’s
number one priority. When asked what
could be improved about the audit report to
make it less “boilerplate”, Mercer provided
two examples. He says including the
material contentious points that have come
out of the audit would be quite an interesting
read if they were in the auditor report, and
outlining the impairment risks and process
by which they value that impairment. These
are the types of matters that would be
disclosed in the proposed Key Audit Matters
paragraph. The market is incredibly quick
to react to new information that is released.
“The market will generally find out about
anything that’s material in that audit report
as soon as someone’s picked up on it,”
Mercer says.
The investing community has a vested
interest in auditing, and understandably
so. A good analyst picks up a huge amount
of information from multiple sources but
a good analyst simultaneously dismisses
what is not important from these sources.
If Mercer could suggest one improvement
it would be for reporting by exception.
He says: “In this time-short era, only
communicating matters that will impact the
valuation of the company would be useful.”
However, the overarching key message he
conveys is that despite coming under fire
in recent times, the general feeling is that
auditors are well-regarded and display
rigorous professional judgement in a
demanding environment.
Zowie Murray CA is a Technical Advisor on
NZICA’s Technical Services Team.
overall the
market
has strong
confidence
in the
auditing
process in
New Zealand
Audit quality – multiple
perspectives
Audit quality is a multifaceted
concept without a universally
acknowledged definition. This is
why we are producing a series of
articles by opinion leaders which
explore the responsibility of several
different parties for contributing to
and enhancing audit quality, with
this being the seventh article in the
series. Last month we considered
an academic’s perspective, and next
month we will conclude the series by
looking at the role of NZICA.

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