The hidden value of audit

Audit provides the bedrock of trust and confidence for our capital markets, but a lot of the value of this audit is hidden. This hidden value relates to how audits improve the quality of financial reporting by identifying errors and changes to disclosures by companies.

One important way we do this is through fraud risk analysis using our Spotlight technology — a bespoke analytics tool that allows audit teams to look for unusual trends and anomalies within large sets of data. Spotlight can process huge numbers of journals for our audit clients, and this year we used the technology to review over one billion client journals. While the value of this level of scrutiny can never truly be measured, it helps assure annual reports are accurate, robust and of high quality.

In its latest report on inspections of audit quality in the UK, the FRC found the quality of auditing is continuing to get better, though there is still room for improvement. The demand, from investors and regulators alike, for more forward-looking and insightful audits is increasing. We will continue to invest to ensure that our high standards of quality in audit are combined with an ability to innovate and provide bespoke and tailored opinionsYou can see more about the FRC’s Audit Quality Review and other reviews of our audit work, as well as our overall approach to delivering quality audits in our Audit Transparency Report.

Fostering dialogue

Historically, the audit profession has had a reputation of being opaque and defensive towards stakeholders. We recognise the need to be more transparent, that the audit needs to constantly evolve, and that we need to listen and act on feedback from our various stakeholders. We are now providing greater transparency around the governance of our firm and also around how we decide which work we will and won’t undertake. We hold an annual Stakeholder Forum that brings together a range of the firm’s stakeholders, including investors, regulators, professional bodies, government, business groups and audit committee chairs, to hear from our senior leadership.

The event gives us a unique opportunity to share our perspectives on our profession and firm, to respond candidly to questions and facilitate debate on topics such as the impact of regulatory reform, the ability of the firm to attract high calibre professionals, the future of audit and corporate reporting, our role in the tax debate and how we act in the public interest.

Our independent non-executive (INE) directors also play an important role in our commitment to improving transparency. Our three INEs, Sir Gerry Grimstone, Sir Michael Peat and Ruth Markland (appointed in April 2015), sit on our main Board of Partners and have oversight of all the public interest aspects of the firm’s business – representing a shift from the more traditional partnership oversight model.

Trust and confidence in the financial system

We take our responsibility in helping to promote stability across international financial markets seriously. One of our senior banking audit partners co-chairs a global, cross-firm working group that engages extensively with organisations such as the Financial Stability Board and the Basel Committee on Banking Supervision. The working group provides insight into issues such as systemic risks in financial markets, going concern capital requirements for banks and development and governance of IT systems.

During FY15, our Portfolio Lead Advisory Service team has been working with governments and supranational bodies across Europe to assess the risks in loan portfolios of financial institutions. This work has been fundamental to supporting the restructuring and recapitalisation of international banking systems. As part of this ongoing process we are leading asset sale programmes on behalf of banks as they seek to meet increased capital adequacy requirements as well as comply with rules on state aid.

Public interest and responsible tax

Tax has become an issue of public interest and concern. An increasing number of companies are seeking to say more about their tax position to help stakeholders’ understanding. We have published guides — under the responsible tax banner — to help companies understand today’s environment and formulate their own appropriate responses. We also financed a study by Henley Business School entitled What stakeholders expect from corporations when it comes to paying Tax: Corporate reputation and optimal tax planning.

There is ongoing concern about the perceived strategies of multinationals to exploit gaps through shifting profits to low-tax locations –so-called base erosion and profit shifting (BEPS). The BEPS project, launched by the G20 in November 2012, has been examining measures to modernise international tax law and address these concerns. We have been involved in responding to requests for comment on BEPS, whether from the G20/OECD working groups or from the UK Treasury and HMRC, to ensure proposals are both appropriate and workable.

Given the potential wide-ranging impact, it is vital that all multinationals are kept abreast of these developments. We have produced briefing notes for companies and have held conferences and individual meetings with clients to help them get to grips with what BEPS means for them. Together with other Deloitte member firms, we have launched a new public resource, at www.beps.tax, to help business globally understand the implications of BEPS.

Ensuring compliance across the globe

A key focus for us this year has been helping multinationals meet their global workforce mobility compliance requirements - helping manage the many elements related to international assignments, including employer tax and social security withholding requirements and the personal tax filing obligations.

We advised Royal Dutch Shell on streamlining its global performance share plan using Deloitte technology to automate and simplify tax calculations. Our work is reducing the administrative burden, improving the experience of their employees and most importantly ensuring full compliance with laws and regulations across 80 different jurisdictions.

Looking ahead: devolved taxes

Supporting the public sector

The need to restore the public finances has been a challenge for government and public services since 2010, requiring difficult decisions by public sector leaders. Deloitte’s most recent State of the State report found that such decisions are likely to become tougher as the UK continues to focus on reducing its deficit. Better productivity is central to progression in the public sector, and our research showed that one percent of staff time saved through a productivity measure is worth at least £1.6 billion to the public purse.

We have helped our public sector clients to save money and also find revenue-generating initiatives. We have focused on increasing efficiencies and productivity while trying to ensure no loss to critical public services, with our efforts being felt across local government, transport and policing.

For example, the Metropolitan Police Service asked us to implement a programme to help it address pressing gaps in performance and budget. The programme is now on target to deliver savings of nearly £200 million a year, while at the same time increasing the number of police on the street.

This year, we have also been helping the Departments for Health and Education to find new ways to improve health and social care in the UK. Part of this work involves supporting government in finding innovative ways to transform children’s care in the country — helping to give better life chances to young people.