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Performance & Financial Management
All Eyes on the KPIs
A recent paper from ICAS, Towards Transparency, represents the next stage in ICAS' contribution to the debate over the future of assurance in annual reports. The paper delivers practical guidance in providing greater assurance and transparency in the reporting of key performance indicators (KPIs). It was developed by a high level ICAS working group, chaired by ICAS President Jim Pettigrew, CA.
The paper's release is set against the backdrop of enhanced non-financial reporting and increased audit committee and board responsibilities as specified in the UK Corporate Governance Code. Both of these have led to a greater emphasis on the predominantly narrative information contained in the front-half of the annual report, of which KPIs are one element.
Responding to these developments, ICAS established a working group in 2014 that included representatives from all Big 4 firms, investors, preparers, audit committees, and internal auditors to determine whether it might be feasible to communicate the assurance obtained by audit committees and boards on the KPIs in the annual report and the nature of the guidance that might be required to assist with this process.
Accordingly, this guidance seeks to fulfil this objective and advocates for the development of a framework of best practice, to be adopted by audit committees and boards, encouraging them to consider the source of assurance obtained over their KPIs as a basis to help them:
- challenge the relevance of the KPIs to the company’s strategic objectives and user needs, and thereby ratify their selection as the appropriate KPIs;
- compare the source of assurance obtained over each KPI against their desired level of comfort;
- communicate the sources of assurance for each KPI to enhance users’ understanding of the assurance process; and
- facilitate increased dialogue between users and audit committees/boards to assess if the source of assurance is as expected/required.
The paper does not intend to define any specific indicators, but to provide some insight to audit committees and boards on the assurance that might be attributable to each KPI. However, to assist audit committees and boards during the KPI selection process, the paper proposes, within section 2, a list of five different characteristics that might be applied to each KPI. These characteristics are: strategic, linkage, reliability, consistency, and completeness.
The guidance also suggests the completion of an Assurance Matrix, within section 3, as a means of communicating the source of assurance attributable to each KPI. This matrix suggests five different sources of assurance that might be obtained over each KPI in the form of High level review; Management verification; Independent internal assessment; independent external assessment (private report); and independent external assessment (public report). Audit committees/boards are encouraged to complete the matrix for each KPI as a means of communicating the assurance obtained.
In order to determine which source of assurance is the most appropriate for each KPI, the matters to be considered by the audit committee / board might include the following:
- the source(s) of assurance that best describes that obtained over the specific KPI;
- the extent to which the KPI has been subject to some degree of challenge, whether internal, external, or independent; and
- the source of assurance that users would expect and need.
The ultimate objective is that this paper will encourage greater dialogue between users and audit committees/boards over the reliability that can be placed on each KPI. It is intended that this increased dialogue and engagement with users will enable audit committees/boards to determine whether the source of assurance obtained meets user expectations.
ICAS is keen for audit committees/boards to use this guidance to help communicate the degree of confidence they have obtained over the relevance and reliability of the KPI and the process undergone to acquire this confidence.
It is acknowledged that there will be challenges during this process and ICAS welcomes feedback from those companies that use the guidance on its relevance and practicality, as well as some of the challenges encountered to inform further improvements and updates as the paper is refined. Please send any comments or feedback to Anne Adrain, ICAS Assistant Director, Sustainability and Assurance.
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