Key Performance Indicators (KPIs) are measures of performance. For a company, they are typically disclosed in the Management Discussion and Analysis (MD&A), which many investors rely on when making financial decisions. Since audit committees are responsible for the financial reporting process which includes the MD&A, the audit committees are ultimately responsible for the KPIs.
Auditors spend weeks, sometimes even months on end, assessing and analyzing a company in order to make a conclusion on the accuracy of its financial statements. Although it may seem an unqualified auditor’s report is the main goal, in reality, there are many aspects with which auditors can assist the audit committees. One of these is KPIs.
From the article “Towards Transparency: Assurance on KPIs – A Practical Guide for Audit Committees and Boards”, published by the Technical Policy Board of ICAS, there are two key aspects that the audit committee needs to think about:
- The KPIs selection process (i.e. selecting the most relevant indicators to measure performance in your specific circumstances)
- Determining the level of assurance
In determining which indicators to disclose, there are 5 characteristics the audit committee can apply to each of the KPIs. They include:
- Strategic – each KPI should be derived from and reflect the company’s strategy
- Linkage – each KPI should be linked to the other information in the annual report on which it is based
- Reliability – each KPI should be accurate, capable of being re-performed and of withstanding challenge
- Consistency – each KPI should be capable of being compared with the previous period’s KPI
- Completeness – the combined KPIs should be complete in that they present a balanced view of the company’s performance and not mislead users by reporting only positive messages.
And this is where the auditors come into play. Given the amount of time auditors spend analyzing the operations of a business, auditors can not only help to ensure that the indicators are calculated accurately, but they can also assist in selecting the proper KPI’s given their knowledge of the client and industry.
An auditor’s role has always included reviewing the MD&A as part of the audit process. However, it is evident that the role of an auditor encompasses much more than issuing an unqualified auditor’s report. In a very real sense, the purpose of an audit itself has evolved as auditors provide guidance and valuable advice on the selection of KPIs which more precisely reflect the unique specifics of that company.
Giving advice on the selection and measurement of KPIs is just one area where the auditor’s role is evolving into a trusted adviser. It is just one example of where the the overall value of an audit can be enhanced.
Are you interested in a value-added audit engagement? At parker simone we offer personal service that reflects your needs. Whether its audit, tax, or general business inquiries, contact a parker simone adviser and we’ll give you the best there is.