10 October 2012

FEE commented on the CPAB Discussion Paper, "Enhancing Audit Quality: Canadian Perspectives— The Auditor Reporting Model"

Following the normal legislative process, the Draft Reports of the European Parliament (EP) Legal Affairs (JURI) Committee on the proposed EC Regulation and EC Directive on Statutory Audit have been issued. The JURI Committee proposes significant changes, which, in FEE's view, shift the primary focus to striking a proper balance between excessive intervention and today’s needs of stakeholders.

1. Auditor commentary

FEE agrees that what users need is more added-value information on the entity audited in the auditor’s report, as FEE is convinced that auditors have a key role to play within the financial reporting chain.

FEE does not agree with proposals to give the auditor a role in navigating the users through increasingly complex financial statements. FEE is much more in favour of giving insights into the audit work performed, based on the significant risks identified and assessed during the audit. FEE believes this will create more entity-specific information in the auditor’s report as well as enhance audit quality.

In this respect, FEE asks for principles-based criteria to indicate:

• what kind of information the auditor has to disclose in the “Auditor Commentary” section;
• how the auditor has to structure this information in his/her report.

2. Going concern

FEE believes that the profession should focus more on what can be done in the area of communication on going concern. Stakeholders need information on the appropriateness of management’s use of going concern, and the audit profession should respond to this need.

However, in relation to this matter, it is essential to attribute the right role to the auditor: the auditor has secondary responsibility after management to provide information about the entity. The auditor should not be enforced to give information not given by management in the financial statements. Therefore, FEE has encouraged the IAASB to initiate discussions with the IASB in order to coordinate such financial reporting enhancements.

3. Other information

Like CPAB, FEE believes that the requirements included in ISA 720 could be further extended to make the auditor’s report more informative and comprehensive.

Therefore, FEE proposes that auditors also report on the consistency of other information with the financial statements, based on his/her knowledge and understanding of the entity and its environment. However, FEE concurs with the CPAB’s analysis that the responsibilities of both parties – management and auditors - should be defined more precisely to avoid creating an expectation gap in this respect.

4. Reporting internally to management and to those charged with governance

Further to the Discussion Paper on the “Auditor Reporting Model”, but linked to the overall project on “Enhancing Audit Quality”, FEE would like to draw CPAB’s attention to some key positions about reporting on internal controls.

Creating more interaction with the audit committee is the right step forward. Such interaction will be fed by more communication of added-value information on the audit work performed.

FEE truly thinks that European legislation should avoid incorporating a Sarbanes-Oxley Act(SOX) approach, but should aim at enhancing efficient communication between the auditor and management on key information related to the entity.

This Draft Report should be seen as a positive first step in the legislative process. It is more reasonable than the EC Proposals and takes better account of market reality, the public interest and the practical input provided by the profession. But, the report is likely to change again during the legislative process. It is not time to reduce attention and the profession needs to continue objectively and reasonably informing the debate in the public interest.

Full comment letter

© FEE