PracticeAuditFear and confusion reign over OFR

Fear and confusion reign over OFR

Concerns have arisen in the accounting profession over the role that auditors will play in the new operating and financial review.

Representatives of accounting institutes have warned that the proposals put forward by the government earlier this month, specifically in relation to auditors, need greater definition or risk creating a new expectation gap that could lead to damaging litigation.

Due to the nature of the OFR, which will contain forward-looking statements and rely heavily on directors’ judgements, auditors are not expected to make a judgement on the content of the OFR as they would on a set of accounts.

Instead, the government has proposed that they express an opinion on the process that produced the OFR.

Auditors, according to the consultation document, must judge whether the directors have prepared the OFR after ‘due and careful enquiry’.

It is this definition that is a cause of anxiety for auditors, as it is currently not backed up with the details of what is expected.

‘This phrase “due and careful enquiry” is likely to cause some problems,’ said John Davies, head of business law at ACCA. ‘It is a brand-new term that will have legal force, but we don’t know exactly what it involves.’

Davies added that, sooner or later, a case would be taken to court that would test the auditors’ role. Without greater understanding of what is involved, it could leave auditors in an unclear legal position.

Robert Hodgkinson, technical director at the ICAEW, said that, unless the responsibilities of both the directors and auditors were more clearly defined and explained, it could lead to the creation of an expectation gap between the auditor’s responsibilities and what the shareholder thought the auditor was doing.

Both thought the outcome of the debate on auditor liability would be crucial in the way auditors approached the consultation on the OFR, which will be handled by minister for industry Jacqui Smith.

There is reluctance from auditors to take on further responsibilities without some form of liability limitation in place.

The new responsibilities will also lead to an increased workload for auditors and a corresponding increase in audit fees.

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