Can auditors be insightful, transparent?
Saturday, 6 June 2015
By: ERROL OH
New standards introduce changes to increase value of audit reports
WOULD you perk up if told that the independent auditor’s report – most of us know it as those two pages in a company’s annual financial statements in which the auditors give their opinion on the accounts – would be very different 18 months from now? Probably not. From time to time, the spotlights swivels to the auditors when people question the reliability of audited corporate results, but we are otherwise indifferent to what the auditors do.Try this instead: What if a regulator believes that the upcoming development may be a game changer? Is that enough to arouse our curiosity?
Hopefully. The revamp of the international auditor reporting standards is meant to make the auditor’s report more useful to investors and others who use the audited financial statements. If we don’t care about the new format, this implies that we don’t value what the auditors have to say.
The Audit Oversight Board (AOB) certainly thinks we should be looking forward to the improved auditor’s report.
In his message in the board’s annual report 2014, issued on Tuesday, executive chairman Nik Hasyudeen Yusoff says, “We view the implementation of the new and revised auditor reporting standards as a possible game changer to enhance the quality of financial reporting in Malaysia. All stakeholders have to be involved to ensure smooth implementation of these standards.”
The International Auditing and Assurance Standards Board (IAASB), the New York-based independent body that sets the auditing standards, says those standards were reviewed because the market wants a more informative auditor’s report, which is the most visible outcome of an audit. To be precise, the accounts users have asked for “more relevant information”.
“Research, public consultations, and stakeholder outreach, including global roundtables, indicate that enhanced auditor reporting is critical to influencing the perceived value of the financial statement audit,” says the IAASB.
In a TV interview last month, IAASB chairman Prof Arnold Schilder explained, “Auditor reporting in the future will become much more informative to outside users that so far didn’t hear anything from the auditor except the final conclusion, the auditor’s opinion. In the future, you will see five, six pages with unique information coming from the auditor about the audit and that’s very relevant to users of that information.”
In this context, the future begins on Dec 15 next year, which is when the new and revised standards take effect.
Yes, we get it, there will be more information. But what exactly?
Some of the changes sound minor. The name of the engagement partner has to be disclosed. The audit opinion must be presented before the auditor explains the basis of that opinion. There needs to be an explicit statement of auditor independence and fulfilment of relevant ethical responsiblities. There will also be an enhanced description of the auditor’s responsibilities and key features of an audit.
But the change that the audit fraternity often discusses is the introduction of a section on “key audit matters”. PricewaterhouseCoopers (PwC) calls it “the most significant innovation in the new standards”.
Key audit matters
According to the IAASB, key audit matters are “those matters that, in the auditor’s judgment, were of most significance in the audit of the current period financial statements”. KPMG has helpfully interpreted this as the areas that the auditor worried about and focused on the most during the audit.
Says PwC, “The intent is to introduce into auditor’s reports a bespoke description of key areas of focus in the audit – in a sense, a window into what kept the auditor up at night. This won’t supplant the auditor’s opinion on the financial statements as a whole, which investors value, but it expands the report by asking auditors to describe what the significant issues were, why they were significant, and how they addressed them.”
The Big Four firm adds that in Britain, where similar proposals have been rolled out, auditors have embraced the transformation. As a result, says Richard Sexton, PwC vice-chairman of global assurance, they have produced insightful reports with tailored information and less jargon. “Shareholder reaction has been very positive, referring to a ‘sea change’ in auditor reporting. This is a good start.”
Will Malaysia have a good start as well? As Nik Hasyudeen points out in the AOB’s latest annual report, the existing format of the auditor’s report is largely a collection of standard terms and boilerplate disclosures. We need to know more.
But it’s not about increasing the number of words and pages. Some of us have the knack of saying plenty without revealing much. Also, too much content can be a put-off.
For the new auditor’s report to be a true game changer, the auditors must believe in the benefits of the reform. They need to offer insights rather than only passing on the bare facts. They ought to be transparent and communicative instead of cold and taciturn.
It has always been difficult to convince people that they’re getting value for money when they pay audit fees. Getting the new auditor’s report right may change that.