In auditing, long is the new short

The revised auditor reporting model provides an opportunity for clarity.

Auditor reporting is poised for sweeping changes worldwide with the introduction of new standards from the IAASB.

The aim is to evolve auditor reports so they clearly communicate key audit matters to investors and other stakeholders, but there’s a risk of adding complexity and length, not value.

The changes will represent a paradigm shift for auditors, financial managers, directors and investors using the reports.

These changes mean auditors’ work, judgements and their ability to communicate with an end user audience on complex issues will be more visible than ever.

The softness, estimates and uncertainty that increasingly permeate financial reporting are also set to be highlighted more sharply under the new model.

Although the auditor reporting changes have been gestating for a few years now, imminent introduction demands practical questions on what this actually means for the audit profession, preparers and, critically, the capital markets.

The Financial Reporting Council in the UK has introduced a similar revised auditor reporting model, providing a live example of many of these opportunities and challenges.

A similar model is being explored by the Public Company Audit Oversight Board in the US.

In a world unsympathetic to “clutter” in financial statements, overcoming the constraints to communicating in a way that truly adds value for end users in the markets is a critical goal for the profession.

From the outset of the auditor reporting project, there has been a concern that the reports could become a “boiler-plate”, adding length and complexity but not value.

The UK experience shows clear distinctions between firms and even individual auditors who have managed to build genuine insights into their report, and others that already appear to have become standard and sanitised.

The more lucid UK reports convey a strong sense of the deep understanding the auditor has gained into their client’s business and the professional scepticism applied to key judgements.

Without going beyond the auditors’ remit, these reports demonstrate the possibilities in a revised reporting model for addressing expectation gaps and more clearly imparting what auditors do and, importantly, what they don’t do.

These expectation gaps – differences between stakeholder expectations and what audits actually entail – have been around for as long as auditing has, boiling over periodically including in recent corporate collapses during the global financial crisis.

An important part in addressing this is clear, plain-language communication with investors.

CPA Australia has developed the plain-language A Guide to Understanding Auditing and Assurance to address expectation gaps such as those highlighted in the various inquiries into corporate collapses in Australia in recent years.

The revised auditor reporting model provides an opportunity for clarity, but also the risk that language constrained by context and legal accountabilities attached to the auditors’ core role might confuse a wider audience, exacerbating expectation gaps.

Addressing legal uncertainty and enhancing the communication skills demanded by such challenges are priorities for the profession.

Those involved in audit tenders would be aware of the significant effort that goes into building reputations, relationships and a convincing all-round package for prospective client audit committees.

The new auditor reporting model will mean shareholders, large and small, have a clearer and more accessible way of evaluating auditors and participating in auditor selection.

While shareholders can currently ask questions of auditors at annual meetings, this rarely happens.

Richer information proposed for auditors’ reports could enable shareholders to engage more both with the current auditor and on deciding who the auditor should be.

When asked in the IAASB’s initial research on auditor reporting, investors plainly said they wanted more information.

Only implementation will reveal whether the outcome – which has evolved noticeably since this initial research – meets the demands of investors, and how the markets will react to more granular, nuanced auditor reporting in terms of individual companies and across sectors.

In many ways, how the opportunities are realised and challenges met will define the profession for years to come.

Amir Ghandar is CPA Australia’s policy adviser on auditing and assurance

The auditor reporting changes – what and when?

Key aspects of the International Auditing and Assurance Standards Board’s changes to auditor reporting include:

  • Auditor commentary on key audit matters – those matters that in the auditor’s judgement were of most significance in the audit as a subset of the matters reported to the audit committee or board.
  • Re-ordering of the audit report to provide the auditor’s opinion up front.
  • Revised descriptions of responsibilities and wording in key areas such as going concern paragraphs.

Subject to adoption by national standard setters, the changes are expected to apply at the earliest for years ending 31 December 2016 in most jurisdictions.'

This article is from the October 2014 issue of INTHEBLACK.

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