05 February 2013

Telegraph: Audits may need to flag risks and disagreements

The Financial Reporting Council (FRC) has opened a consultation on new rules that would compel auditors to write a "commentary" flagging problems, risks, or disagreements with management at audited companies. The move is likely to be seen as controversial by companies but will be welcomed by shareholders.

"It has been a waste of time to read 99 out of 100 audit reports", said Nick Land, chairman of the FRC's audit and assurance council. "Although shareholders got a set of accounts that were true and fair there was no point in reading any of it."

Since the financial crisis, shareholders have criticised the opaque nature of audit reports, which gave banks like Northern Rock a clean bill of health before it collapsed.

The consultation says that investors have complained audits are full of “largely standardised language, which [have] little informational value”. Investors also think the “pass or fail” approach of audits leads to more confusion than clarity.

Finally, auditors would define the “materiality” of businesses, clarifying how much of the total profit was affected.

According to the FRC, shareholders want the commentary to include: “evaluating risks and controls; valuation judgments; and write downs and impairments".

Full article

© The Telegraph