01 August 2012

AccountancyAge: Audit reporting rules could see 'duel' accounting

Richard Crump observes that 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.

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.

Montgomery concedes that auditor liability is a "difficult and complex" issue and auditors seem split on what they make of it. Some, such as Richard Sexton, head of reputation and policy at PwC, perceive it as a threat that the profession is "willing to manage", while others, such as Herbinet, think it could actually limit liability.

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