ICAEW: Pass/fail audit report is best

AUDITORS’ REPORTING model should not be extended to disclose company information that is not already in the public domain, the ICAEW has argued.

US regulator the PCAOB has proposed extending the audit report template to offer investors more detail on risks and business models, but the ICAEW has warned if management has not disclosed the information, the auditor should not do so.

Currently, audit reports operate on a pass/fail basis, and the PCAOB has mooted the idea of a more nuanced auditor opinion with greater detail on company strengths and weaknesses.

Executive director Robert Hodgkinson said: “It is important to distinguish between company and auditor reporting. It is the responsibility of the company’s directors to share information with investors and other stakeholders on the company’s finances. The auditor is there to assess whether the company has done so appropriately.”

The institute acknowledged there is “scope for improvement” in the current audit reporting model but insisted “it is not broken”.

Debate around the disclosure of significant audit risk would be more appropriate, Hodgkinson said. “Management and the audit committee are responsible for reporting business risks. Business risk and significant audit risks are not necessarily the same.

“While auditors are there to point out any shortcomings in a company’s financial reporting, they should not provide original information on the company apart from in exceptional circumstances. Splitting the responsibility for reporting between auditors and management would cause confusion,” he continued.

ICAEW head of audit and assurance, Henry Irving, said significant audit risks are those that affect financial reporting, such as going concern and the numbers in financial statements.

He dismissed the suggestion that auditors are already reporting on these issues, saying: “It’s about the way it’s presented.”

Currently, auditors might include a note directing readers to the relevant disclosure in a company’s financial statement. The ICAEW’s proposal would offer “something a bit more fulsome”, he claimed.

This could take the form of a “summary statement” underlining the principal reporting risks and why the company was given a clean bill of health.

Irving said the institute “is very supportive” of an International Auditing and Assurance Standards Board audit report consultation, which seeks to address the expectation gap between what users think audit delivers and its actual function.

A PCAOB roundtable discussion on the auditor’s reporting model took place in mid-September, and the comment period has now closed.