Cochlear – a global leader in the hearing implant market – was among the early adopters of advanced audit reporting in Australia. We speak to Cochlear’s CFO Neville Mitchell about the lessons learnt since adopting the new standards.
By Michelle Lindsay
New auditing standards set by the International Auditing and Assurance Standards Board (IAASB) will produce the biggest changes in company auditing in decades.
Set to become mandatory in December this year, they will make auditors’ reports more informative, transparent and revealing.
They include significant revisions of six existing standards and the introduction of the new ISA 701 standard on communicating key audit matters in the auditor’s report.
Commitment to transparency
While many companies are waiting until next year to implement the new changes in their audit reports, one Australian company has chosen to take the lead. Cochlear, one of Australia’s most innovative biotechnology companies, applied the updated standards to its report last year.
CFO Neville Mitchell says that adopting the new international audit standards early was part of a broader commitment to improving transparency across the company.
“We currently have a climate where there is an unfortunate suspicion around business,” he says.
“There’s a real perception that if you haven’t got anything to hide, you should let the community at large get a better understanding of what’s going on behind the scenes.
“Activities like the new audit report signal that we are making a contribution to increasing transparency and are open for questioning.”
As well as the new audit standards, Mitchell says that Cochlear has embarked on a “cut the clutter” approach to reducing the size and complexity of financial statements, something that fitted well with the new standards.
“This year,” he adds, “we’ve also moved on to the Tax Transparency report, so it’s all part of the broader response.”
Managing the risks
While Mitchell agrees that increased transparency can be a problem for companies with something to hide, he says that generally the risks of the new reporting regime are minimal.
“The standards are pretty straightforward,” he says. “There’s not too much wrong with them.”
For example, in the Cochlear report, the auditor highlighted the preservation for a 2011 product recall as a key audit matter, noting the “inherent subjectivity” in the cost estimation.
“While this preservation has been in place since 2011-12, it has been called out in the report as an area the auditors still test,” explains Mitchell.
“There’s some uncertainty around the cost of this event – it’s subject to interpretation and you have to put some assumptions around it.”
Despite this, Mitchell says there was very little reaction from outside the organisation.
“In this particular case, there is nothing remarkable about it,” he adds.
“But if the auditor saw big variations from year to year, then that might be interesting to investors.”
Enhanced auditor reporting: key audit matters
What is a key audit matter?
A key audit matter is something communicated to the company that required significant auditor attention – usually high-risk matters involving significant auditor and management judgement or involving significant events or transactions. In the report, the auditor must explain why they focused on these areas and how they addressed them in the audit.
Transitioning to the new standards: three key steps
Work with your audit committee
Early engagement with your audit committee can help ensure it understands additional matters reported under the new standards. It can also facilitate dialogue about the company’s disclosures regarding matters that may be reported on by the auditor.
Understand the consequences
Casting a spotlight on key audit matters may invite extra scrutiny of financial reporting from investors. So if there are any issues that could be sensitive, make sure you have a plan in place to explain and reassure.
Do a dry run
While transparency is desirable, surprises are not. Doing at least one dry run of the audit report and circulating it to the audit committee for feedback can help ensure that any sensitive disclosures can be addressed and explained.
IAASB aims to make auditor reports more transparent