The Illusion of Insight in an Extended Auditor's Report

Abstract

KPMG's discussion of Bribery and Corruption as a Key Audit Matter (KAM) in the Extended Auditor's Reports (EAR) of Rolls-Royce for 2013-2015 is examined as implying limitations on EARs in general. The KAM for Bribery and Corruption was apparently written in view of the company's legal interests rather than from the point of view of what an investor would want to know from a truly independent representative with that kind of privileged access. The Financial Reporting Council has stated that the two purposes of EARs are (i) to inform investors and (ii) to give them greater confidence in the audit. However, (i) the Bribery and Corruption KAM failed significantly to inform investors, while yet, troublingly, giving the impression of informing them. Moreover, (ii) it encouraged a misplaced confidence, in view of the roughly $1 billion in fines and clawbacks in the (generous, highly mitigated) Rolls-Royce Deferred Prosecution Agreements of January 2017.