Auditors are concerned they will now have to say something about a company that the company isn’t saying itself, says Institute of Chartered Accountants head of audit policy Liz Stamford.
Photo: Nic Walker
A proposal to ask auditors to provide their opinion on a company’s accounts as part of their audit report has met with a firm response from the audit community: it’s not a good idea.
Since the start of the global financial crisis, there’s been an international push to improve the way financial reports are prepared. Last June, the International Auditing and Assurance Standards Board (IAASB), the global body that sets standards for auditing and assurance, invited comment on an innocuous-sounding report called Improving the Auditor’s Report. Its headline proposal was a call to allow greater commentary around audits.
“There’s been questions about the value and relevance of audit; do they give us enough value or do we need to improve auditing standards?” Australian Auditing and Assurance Standards Board chairman Merran Kelsall says.
The AUASB is responsible for setting auditing standards in Australia and has heard a range of concerns from the business and audit community about allowing auditors to give opinions. Many believe it could make the process of preparing financial reports more time consuming and costly, running counter to the proposal’s aim of simplifying the process.
The IAASB’s initial proposal has attracted much debate, with 165 submissions from business leaders and accounting bodies around the world. The IAASB meets again this month but will not make a final decision until June. The industry does not expect any changes to take effect until 2014-15.
“The overwhelming majority were concerned that auditors would now have to say something about the company that the company wasn’t saying itself,” the Institute of Chartered Accountants head of audit policy Liz Stamford, says.
Although the ICAA agrees there’s room to give better information to investors, it’s up to the company to make disclosures, not auditors, she says.
“If there’s a shortfall, the company or managers have to make up for it. They have to disclose what’s required under standards and if they don’t, the auditor already has scope to comment. But should auditors be making commentary about the business?. . . A range of responses [warn] the auditor might not have the skills or enough information to comment on business operations as they not running business themselves.”
The IAASB met in December in New York and determined that auditors can still emphasise matters and qualify opinions where necessary. But they took into account the view that while “significant auditor judgment may be a useful way forward . . . the auditor should not provide original information about an entity”.
But Stamford says when it comes to commentary it’s still not clear what’s being required. “They’re [the board] is saying we like the idea . . . and we still see value in providing commentary. It’s just that commentary should be about the audit process not the company.”
While the IAASB proposals offer the opportunity for genuine change, significant work is required if they are to offer real value to the end user, CPA Australia policy adviser on audit and assurance, Amir Ghandar, says.
“The simplicity of the current auditor reporting model will inevitably be impacted if auditor’s reports become longer, and less standardised,” he says. “The question is whether the trade-off will be worth it for stakeholders. There’s an acute risk that auditor commentary could become boiler plate and of little value to stakeholders, particularly given the legal ramifications attached to the auditor’s core role of providing assurance on financial statements.”
Ghandar says an option previously explored, but which was shelved in the latest IAASB consultation paper, is commentary by audit committees. “This would preserve the auditor’s role as a provider of independent assurance, rather than an originator of information about companies.”
He says that although investors want more revealing and detailed commentary, as was originally envisaged, “to legitimately address such calls could requires revisiting the scope of audits, or a separate type of assurance engagement, rather than just changes in auditor reporting”.
Stamford says auditor commentary may be useful for shareholders, but only when it comes to large companies. “With smaller businesses, the costs are likely to outweigh the benefits,” she says. “When it comes to the smaller end, we’re saying, ‘seriously consider whether this needs to go in at all’.”
Regardless of size, the process of relaying comments to investors in simple language isn’t an easy one. “To try and simplify a complex audit clearly, but still with enough detail about what’s being done, is a challenge,” Stamford says.
The board has also sought comment on proposed amendments to ISA 720, which would require auditors to consider information in certain documents accompanying audited financial statements. If the auditor finds an inconsistency or misstatement, they will have to respond.
“The days of a neat, stand-alone, hard copy, annual report being mailed to investors are long gone,” Stamford says. “The proposed change increases the remit to acknowledge the increase in company disclosures made outside of the formal annual report.”
She says that not only increases the amount of auditing work, but may raise practical problems in the classification of “accompanying” documents, given possible different publication dates of relevant documents.