WITH THE IAASB adding its voice to calls for fundamental change to auditor reporting, the clamour for auditors to opine on company-specific information has reached a din that the profession can no longer ignore.
In June, the IAASB published a raft of proposals aimed at improving the auditor’s report that accompanies annual financial statements, adding weight to similar initiatives launched by PCAOB, FRC and contained within the European Commission’s plans to overhaul the audit market.
In addition to improving corporate reporting in a general sense, the various initiatives aim to force auditors to provide greater transparency about significant matters in the financial statements, as well as the conduct of the individual audit.
The changes will no doubt make the auditor’s report more interesting as well as insightful. The one-page report has, at times, been derided for being an unremittingly dull description of how the auditor has discharged its duties that, couched in standardised wording, sheds no light on subjective matters in financial statements.
David Herbinet, audit partner at Mazars, hopes that providing more information will “improve the perception and visibility of audit quality” and go some way to repairing the battered reputation of audit that was the result of failings in the audit of public interest entities in the lead-up to the banking collapse of 2008.
Though the call for change initially came from institutional investors and financial analysts – there appeared to be little appetite among the companies themselves – auditors seem to have come on board now that change seems inevitable.
“It’s mainly coming from the investor community; I don’t think much of a push has come from the companies and auditors,” says Hugh Morgan, technical director at Baker Tilly and responsible for drafting the firm’s response to the IAASB’s proposals.
“We are happy the IAASB is leading the charge. There is a view they will do a sensible job. It is early days, but what they have come out with is very well thought through.”
Dan Montgomery, deputy chairman of the IAASB and chairman of its Auditor Reporting Task Force, says feedback from auditors has so far been “generally positive” and that the profession has acknowledged that “change is needed and entry-specific information of some kind will need to be provided”.
At the heart of the suggested improvements is the need for transparency on matters specific to the audited financial statements and the audit performed. The IAASB has proposed adding a new section whereby the auditor can call attention to matters important to the users’ understanding of the audited financial statements or the audit.
There are also suggested improvements with respect to new statements regarding going concern and other information in documents containing the audited financial statements; the description of the responsibilities of the auditor and key features of the audit itself; and enhancement to the format of the report.
But changes – ones that will see auditors explicitly commenting on management assumptions rather than simply signing off the accounts, and will throw hitherto private conversations between audit committee and auditor open to public scrutiny – naturally raise a number of risks.
For instance, there may be confidentiality or liability implications to auditors as a result of providing commentary that includes reference to matters not disclosed by management.
Montgomery concedes that auditor liability is a “difficult and complex” issue and auditors seem split on what they make of it. Some, such as Richard Sexton, head of reputation and policy at PwC, perceive it as a threat that the profession is “willing to manage”, while others, such as Herbinet, think it could actually limit liability.
“Clearly, auditor liability needs to be put on the table and should not be ignored. It may be that the more auditors disclose the less liability they will face,” Herbinet says.
There is also a fear that provision of certain information could end up competing with management’s disclosures, thereby resulting in “duelling information” representing two versions of the truth.
According to Montgomery, duelling information will be impossible to avoid. However, most of the issues thrown up can be dealt with by the right level of communication between auditors, management and those charged with governance, while Sexton says there should be a clear demarcation between the statements being made by auditors and management.
“Ideally, the auditor’s commentary is designed to draw attention to things already discussed in the financial statement. It should point attention towards key disclosures,” Sexton says. “I don’t think it is a case of two versions of the truth.”
There is also a risk of increasing the expectation gap, to the extent that readers interpret the inclusion of auditor commentary as providing assurance on individual accounts or disclosures, while the fear of standardised wording creeping in and auditor statements reverting to boilerplate is never far away.
It is hoped that the risk of boilerplate should be negated because auditors are commenting on client-specific audit issues, but many of the issues will nevertheless crop up on a company-by-company basis – such as goodwill impairments, financial instruments and the valuation of intangibles.
Once again, this is an issue the IAASB recognises as needing some clarification – auditors would not be expected to create new language to add to the wording of the report – particularly around differences in how boilerplate is viewed.
“I don’t think all users’ view is the same,” says Montgomery. “If you look at some of the more standardised language in the audit report, such as auditors’ responsibilities, most agree that uses boilerplate language.
“But even if auditors might comment in largely the same way on the same type of matters, some have indicated they don’t believe that to be boilerplate. They perceive value in auditors commenting on these areas that users might find important.”
Richard Crump discusses the week's news
BDO relinquishes Benchmark audit after 15 years
Greg Tufnell, brother of former England cricketer and TV personality Phil, is reportedly leading the bid by Richess Group to secure control of retailer
Bernadine Burnell will lead challenger bank's internal audit function