Audit reports targeted for reform

Investor groups are leading a charge to bring in tailor-made audit reports
which go beyond boilerplate and offer insight into the secret decisions
companies struggle with behind closed doors.

Investors want to see auditors play a bolder role in the market place,
opening a window into internal company decisions and highlighting issues of
concern on a more frequent basis.

A working group within the Financial Reporting Council (FRC) is discussing
whether to widen the scope of audit reports which many investors believe only do
the“minimum” and are“overly legalistic”.

The standard audit report is a legal requirement for companies with more than
£6.5m in turnover and functions largely to provide assurance about the accuracy
of financial statements.The Association of British Insurers (ABI), which
represents 20% of investments in the London stock market, believes investors
make little use of auditors’reports.

Michael McKersie, assistant director of capital markets at the ABI, said
reports convey limited information and vary little from company to company.

He said he would like to see information on internal “accounting judgments”.
“This could give a usefulmeasure of insight that would benefit investors’
understanding of the performance and prospects of companies.”

McKersie, who also sits on the FRC’s working party, said it was important
“shareholders are given the information they need in order to act as responsible
owners of companies.”

The trade body for the UK’s £3 trillion asset management industry, the
Investment Management Association (IMA), said it would welcome more disclosures
“on judgmental matters”.

Liz Murrall, corporate governance and reporting director with the IMA and
member of the FRC working group, wants more information on the “principal
assumptions” that underpin significant internal decisions. “The auditors’ role
should be to ensure that these matters are adequately disclosed, and, if not,
consider addressing them in the audit report,” she said.

There’s also discussion about the use of “emphasis of matter” statements,
used by auditors to highlight issues fundamental to understanding financial

Murrall said there remains confusion about the use of such statements owing
to differences between legal requirements and audit guidelines.

“In this context, requirements for matters of emphasis are different in
company law and ISAs and it would be helpful if there was more clarity around
this issue,” she said.

Richard Sexton, UK head of assurance at Pricewaterhouse Coopers, said there
might be a case to “sharpen up the language”, but believes there is a danger of
having too many voices in an annual report. “We have got to guard against having
two voices saying the samething

in two different ways because that can be very confusing.”

Related reading