The Debate: Interim results
Proposals for audit reviews of interim results have stirred up the accountancy industry. Jon Grant thinks they are a good idea, while Ross Midgley says 'yes, but ...'
Proposals for audit reviews of interim results have stirred up the accountancy industry. Jon Grant thinks they are a good idea, while Ross Midgley says 'yes, but ...'
Good news for shareholdersBy Jon Grant
There has been animated press comment in recent weeks about the Auditing Practices Board’s proposal, made in a response to the FSA on its plans to update listing rules, that auditor reviews on interim statements should be made mandatory.
Listing rules do not currently require interim statements to be reviewed by auditors prior to publication but, where a company requests a review on a voluntary basis, there is a requirement for the report of the auditors to be reproduced in full.
The APB is a strong advocate of the listing rules going further and requiring auditors to review interim financial information. There are a number of reasons for this. Firstly academic research has shown that the announcement of interim results often causes share prices to change. If shareholders are making buy/sell decisions based on the interim results it is not unreasonable to assume they believe the results to be reliable.
A survey of auditors undertaken by APB in 1996 shows that when a voluntary review was undertaken the auditors thought they had had a significant impact on the measurement or disclosure of the interim results. And increased attention is being given to the reliability of interim results in other countries.
Some commentators have questioned APB’s proposal on the basis that larger listed companies already request their auditors to review the interim results and to make reviews mandatory would impose an extra burden on those companies that do not do so. Concern about administrative costs misses the point that it is the shareholders who are meant to be the prime beneficiaries of the review.
It is true that about two thirds of FTSE 100 companies now require their interims to be reviewed and this seems to be increasing. However, the likelihood that a review is performed decreases with the size of company.
In the APB’s view shareholders of all companies would benefit from assurance that interim results are reliable.
Tread carefullyBy Ross Midgley
Capital markets are dependent on accurate, up to date and relevant information, so does it follow, therefore, that interim statements should be made subject to mandatory review by auditors, as the Auditing Practices Board has suggested?
The answer, in ACCA’s opinion, is a resounding ‘yes, but …’.
Yes, because auditor involvement in the figures can only improve reliability. Yes, because a published report adds to credibility – even in the present environment where the reputation of the audit is struggling to recover.
But there are some dangers.
Remember the APB is calling for a ‘review’, not an audit. Although the review is not new – 60% of FTSE-100 companies already produce one voluntarily – we must be careful not to create a new ‘expectation gap’ which may make matters worse.
The timing is also poor, with the whole area of financial reporting and auditing in a state of flux after the events of last year.
All of Europe is in transition to international accounting standards by 2005. US and European legislation and the new ethical code from the International Federation of Accountants are changing independence rules for auditors.
The whole basis of the ‘review engagement’ is subject to a major review by the IAASB.
And the interim statement itself – in effect, just another snapshot – may soon come to look dated as real time reporting becomes the norm.
At best, these proposals will improve the accuracy and timeliness of interim results.
But they fail to address the third leg of what the market needs – the test of relevance.
Can the interim statement itself be improved, perhaps by adding more non-financial information such as market analysis and risk assessment?
APB is right to suggest that we should be thinking about this issue now.
But before we rush to adopt yet another new regulatory solution (which will, as always, hit smaller companies hardest) some joined-up thinking is needed.