Audit reporting rules could see duel accounting

By Richard Crump, AccountancyAge

WITH THE IAASB adding its voice to calls for fundamental change to auditor reporting, the clamour for auditors to opine on company-specific information has reached a din that the profession can no longer ignore.

In June, the IAASB published a raft of proposals aimed at improving the auditor's report that accompanies annual financial statements, adding weight to similar initiatives launched by PCAOB, FRC and contained within the European Commission's plans to overhaul the audit market.

In addition to improving corporate reporting in a general sense, the various initiatives aim to force auditors to provide greater transparency about significant matters in the financial statements, as well as the conduct of the individual audit.

The changes will no doubt make the auditor's report more interesting as well as insightful. The one-page report has, at times, been derided for being an unremittingly dull description of how the auditor has discharged its duties that, couched in standardised wording, sheds no light on subjective matters in financial statements.

David Herbinet, audit partner at Mazars, hopes that providing more information will "improve the perception and visibility of audit quality" and go some way to repairing the battered reputation of audit that was the result of failings in the audit of public interest entities in the lead-up to the banking collapse of 2008.

Though the call for change initially came from institutional investors and financial analysts – there appeared to be little appetite among the companies themselves – auditors seem to have come on board now that change seems inevitable.

"It's mainly coming from the investor community; I don't think much of a push has come from the companies and auditors," says Hugh Morgan, technical director at Baker Tilly and responsible for drafting the firm's response to the IAASB's proposals.

"We are happy the IAASB is leading the charge. There is a view they will do a sensible job. It is early days, but what they have come out with is very well thought through."

Dan Montgomery, deputy chairman of the IAASB and chairman of its Auditor Reporting Task Force, says feedback from auditors has so far been "generally positive" and that the profession has acknowledged that "change is needed and entry-specific information of some kind will need to be provided".

At the heart of the suggested improvements is the need for transparency on matters specific to the audited financial statements and the audit performed. The IAASB has proposed adding a new section whereby the auditor can call attention to matters important to the users' understanding of the audited financial statements or the audit.

There are also suggested improvements with respect to new statements regarding going concern and other information in documents containing the audited financial statements; the description of the responsibilities of the auditor and key features of the audit itself; and enhancement to the format of the report.

But changes – ones that will see auditors explicitly commenting on management assumptions rather than simply signing off the accounts, and will throw hitherto private conversations between audit committee and auditor open to public scrutiny – naturally raise a number of risks.

For instance, there may be confidentiality or liability implications to auditors as a result of providing commentary that includes reference to matters not disclosed by management.