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ACCA: Improved EU transparency in auditor reporting - 'Making this a reality in the European market'
The IAASB proposals towards improving auditor reporting are a welcome step in the right direction, but some tensions remain. Consistency and convergence of existing and upcoming initiatives in this field are crucial, an expert roundtable organised by the FRC and ACCA revealed.
In July 2013, the IAASB published far-reaching proposals to make auditors’ reports more informative in an exposure draft entitled Reporting on Audited Financial Statements: Proposed New and Revised International Standards on Auditing (ISAs). The proposals follow from earlier consultations in 2011 and 2012, which were developed after research into user perceptions of auditor reports and following-up the global financial crisis, which triggered key questions linked to the quality and effectiveness of auditing, professional judgement and skepticism, as well as relevance of audit and trust in the audit profession.
In light of the ongoing debate on audit reform that is currently taking place at EU level, it is very important to ensure consistency of the various upcoming proposals on the issue. With this in mind, the FRC and ACCA recently jointly hosted an informed roundtable discussion in Brussels for interested parties to discuss, first-hand with the leadership of the IAASB and experts from EU institutions, regulators, the business community, leading investors, as well as the auditing and accountancy profession, the IAASB proposals to improve auditor reporting transparency and how to make this a reality in the European market.
The event started with a presentation by Professor Arnold Schilder, Chairman of the IAASB, of why change was needed, the background to the IAASB proposals and an overview of its content. He indicated that 'the proposed improvements represent a significant change in practice, but they are critical to the continuing perceived value of the audit and relevance of the profession. Now is the time to begin thinking about how to prepare for the future to help ensure success, from the point of view of both practitioners and users.'
Discussions revealed the importance of the issue and its international dimension, as illustrated by the number of other existing initiatives in this area, such as the ones from the US PCAOB, the UK’s FRC, and the EC. Most speakers highlighted the need for consistency, convergence and harmonisation, while recognising that a lot of effort was being made in order to make that happen.
There was a general feeling that whereas things are moving in the right direction, there remain however a number of areas of tension. For instance, the IAASB proposals* clarify what information should come from which source, but businesses reiterated a strong concern that the auditor should not provide original information about the company. Investors expressed doubts regarding the accountability and transparency of the audit, essentially because they felt excluded from the audit process and real findings, and hoped that the IAASB proposals will introduce a more enlightened audit report. They welcomed the introduction of the new 'Key Audit Matters' (KAM)*, but warned that improved disclosures should not become standardised and boilerplate year after year, they should remain meaningful and tailored to companies’changing circumstances.
The scope of application and the role of national regulators were also discussed. There were some further questions around KAM and their interrelationship with 'emphasis of matter' and the new section on 'going concern', and ordering of key paragraphs. Is it clear what a KAM is? Some asked whether we need more guidance, while some said the more guidance you have, the more constraints there are.
* The IAASB proposals include:
ESMA has published its comment letter to the IAASB on the Exposure Draft (ED) Reporting on Audited Financial Statements: Proposed New and Revised International Standards on Auditing.
ESMA believes that the proposed auditor’s report should bring a higher degree of transparency to the audit process, thus contributing to increased responsibility for and enhanced accountability of the auditor.
ESMA supports the general direction of the proposed changes. However, ESMA is concerned that the proposed standards do not provide clear requirements and sufficient guidance to guarantee consistency in the auditors’ approach to key audit matters. Efforts should be undertaken to avoid as much as possible situations where auditor’s reports are different despite very similar circum-stances in practice.
ESMA also believes that items included in the Key Audit Matters section should be made unique and as specific to the audit of the entity as possible and should not contain boilerplate language. Consistent with ESMA’s comment letter to the IAASB’s Invitation to Comment – Improving the Auditor’s Report, ESMA would like to re-emphasise that the auditor’s reporting on going concern is of crucial importance for users. While supporting the explicit reference to the assessment of going concern, further consideration should be given to a more entity-specific going concern assessment in the auditor’s report. ESMA would also encourage the IAASB to work further on this issue in close cooperation with the IASB and provide more detailed guidance on the concept of going concern.
ESMA encourages the IAASB to consider the European Commission proposal for an amended directive on statutory audits and to consider the need to amend ISAs in that respect.