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Commentsbyauditorsimmediatelyfollowingtheglobalfinancialcrisisthattheyhadhadagoodcrisisreferringtotheabsenceofpertinentaudit
failuresbeggedthequestionastotherelevanceoftheauditand,moreparticularly,theauditorsreport.ByLindadeBeer
Auditorsplayanimportantroleinthefinancialreportingchainandareakeyassuranceproviderforinvestors.However,iftheirreportsareseemingly
inconsequentialininstancesofcorporateandbankfailuresthatresultedinsignificantshareholderandstakeholdervalueerosion,changeis
inevitable.
AsaresultinternationalregulatorssuchasthePublicCompanyAccountingOversightBoard(PCAOB)intheUnitedStates(US)andintheEuropean
Commission(EU)undertookprojectstoconsidertherelevanceoftheauditorsreportandtheneedforchange.TheInternationalAuditingand
AssuranceStandardsBoard(IAASB),whosetsInternationalStandardsonAuditing(ISA),followedsuitandsoontooktheleadinthisimportant
project.
TheIAASBissueditsfinalstandardstoimprovetheauditorsreporton15January2015.
THEAUDITORSINFORMATIONGAPCREATEDTHENEEDFORCHANGE
Theassessmentofthefinancialcrisisinsofarascorporatefailuresandthevalueofanauditareconcerned,resultedinregulatorsandinvestorsrecognisingthatauditorshavesignificant
insightintotheauditedentity.However,theauditorsreportiswritteninstandardisedboilerplatelanguagethatdoesnotprovideanyinsightintothisauditorknowledgeoftheentityotherthan
abinarypass/failopinion.Thisisnotamatteroftheauditorhavingtodomorework,butmerelygivinginsightintotheworkalreadydone.Someinvestorsexpressedtheneedtobeableto
seetheunderlyingentitythroughtheeyesoftheauditor.Thisisreferredtoustheauditorsinformationgap.
Suchadiscussionautomaticallyfallsbacktotheageolddebateontheexpectationgapthegapbetweenwhatsomeexpecttogainfromanaudit(interaliaconfirmationontheviabilityof
theentitysbusinessmodel,itscompliancewithlawsandthestateofitsgovernance,aswellastheabsenceoffraud,inadditiontotheabsoluteaccuracyofitsfinancialstatements)versus
theactualassurancegivenbytheauditor(aconfirmationthatthefinancialresultsandpositioninthefinancialstatementsisafairreflectionandthusreliable).
Reportingtheauditorinsightsviatheauditorsreport,andhencehavingapeekintotheentitythroughtheeyesoftheauditor,runstheriskofextendingthescopeoftheauditnotonlyto
expandtheauditorsreportbutalsotoreducetheexpectationgap,asitmightbearguedthatauditorsmighthavetodomoreworkand/orthatauditfeesmustincrease.Postthefinancial
crisistherewasverylittleappetiteforincreasedauditfees.Also,therewasarecognitionthatchangesweremeanttoaddresstheinformationgapandnottheexpectationgap.
TheIAASBsprojectwasthereforespecificallyscopedtoenhanceauditorreportingwithintheexistingscopeoftheauditthustheauditorsworkeffortwillnotbeexpanded.Itwasmerelyan
attempttoreportontheworkthatwasalreadyperformedbyauditors,thusenhancingthecommunicativevalueoftheauditorsreport.
WHATWILLCHANGE?
Reportingonkeyauditmatters
Infuture,effectiveforauditsoffinancialstatementsforperiodsendingonorafter15December2016,theauditorsreportoflistedentitieswillincludeasectiononkeyauditmatters(KAM).A
newauditingstandard,ISA701(CommunicatingKeyAuditMattersintheIndependentAuditorsReport),hasbeenissuedtogiveeffecttothis.
KAMaredefinedasthosemattersthat,intheauditorsprofessionaljudgement,wereofmostsignificanceintheauditofthefinancialstatementsofthecurrentperiod.IndeterminingKAMthe
auditorwillconsidertheareasofhigherassessedriskofmaterialmisstatement,areasthatrequiresignificantauditorandmanagementjudgement(forinstancewhereaccountingestimates
areused),aswellastheeffectofsignificanteventsortransactionsthatoccurredduringtheyearunderaudit.
AsKAMaremeanttofocusontheauditandgivefurtherusefulinformationinrespectoftheaudittoassistthereadertounderstandtheentitybetter,theyarenotintendedtosupplyoriginal
informationabouttheentity.Itistheroleofmanagementtoprovideadequateandtransparentdisclosureinthefinancialstatementsontheentity,itsactivitiesanditstransactions.The
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auditorsroleistogiveassuranceastowhetherthefinancialstatementspreparedbymanagementareafairpresentation.
ThisriskoftheauditorbeingtheoriginatorofinformationviaKAMwasaconcerninitiallyraisedbypreparersoffinancialstatements.AconsequentialfuturebenefitoftheKAMrequirement
mightbethatasmanagementknowthatKAMwillbereported,areluctantpreparermightbeencouragedtoconsiderandimprovethetransparencyoftheentitysfinancialinformation.
InvestorsindicatedthatKAMshouldnotbeusedtoprovideinformationoverloadonauditproceduresandprocesses.ThesowhatquestionshouldbeansweredinthedisclosureofaKAM.
InitiallyKAMwillonlybearequirementforlistedentities.However,anyauditorcanelecttodiscloseKAM,butwouldobviouslydiscussthatwiththeauditcommitteeintheplanningstagesof
theaudit.Overtime,experienceandbenefitswilldictatewhethertheKAMrequirementgetsextendedtotheauditsbeyondthoseoflistedentities.
Goingconcern
Ideallyinvestorswouldhavelikedtoseeeveryauditreportmakingapositivestatementastowhethertheentitywascorrectinapplyingthegoingconcernassumptioninpreparingthe
financialstatementsaswellaswhetheranymaterialuncertaintiesexistthatmightthreatenthegoingconcernoftheentity.
Unfortunately,thefinalchangestotheISAsdidnotgothatfar,mainlybecausethefinancialreportingstandardsetters(suchasthesettersofInternationalFinancialReportingStandards
(IFRS)andUSreportingstandards)firstneededtogettheirhousesinorderinenhancingfinancialreportingrequirementsregardinggoingconcern.
TheISAchangesrequirethat,ifmanagementusedthegoingconcernbasisofaccountinginappropriatelyinpreparingthefinancialstatements,theauditorshouldexpressanadverseaudit
opinion.Itfurtherrequiresthat,ifmanagementdidnotadequatelydiscloseinformationaboutamaterialuncertainty,theauditorshouldexpressaqualifiedoradverseoptionandstateinthe
basisforthequalificationthatmaterialuncertaintyexiststhatmaycastsignificantdoubtontheentitysabilitytocontinueasagoingconcernandthatthefinancialstatementsdonot
adequatelydisclosesuchmatters.However,ifmanagementprovidedadequatedisclosureaboutthematerialuncertainty,theauditorwillgiveacleanopinionbutalertuserstothematerial
uncertaintydisclosedbymanagement.Thiswillbedoneunderaseparateheadingintheauditorsreporttoensurethatitisprominent.
ItisimportanttonotethatthegoingconcernrequirementsarenotjustapplicabletotheauditoflistedentitiesbuttoallauditsperformedinaccordancewithISA.
Communicationwithauditcommittees
Managementandauditcommittees(thosechargedwithgovernance)haveavestedinterestinknowingwhichmattersareofmostsignificancetotheauditor.Therefore,itwouldbecounter
productiveforinvestorsifthereisadisconnectbetweenwhattheauditorreportsasKAMandthelevelofinformationthattheentityprovidesonthematter,orevenworse,iftheauditorreports
aKAMandmanagementortheauditcommitteeisoftheviewthatthematterisofnosignificance.TothisendtheISAstandardthatdealswithcommunicationwiththosechargedwith
governancehavebeenstrengthenedtoensureearlyandongoingcommunicationbetweentheauditorandtheauditcommittee.
However,itistheauditorsprerogativetodecidewhatshouldbereportedasKAM.Thiscannotbechangedoroverruledeitherbymanagementorbytheauditcommittee,asitwouldnotbe
inthepublicinterest.
Afewotherchanges
Theauditorsopinionwillmoverighttothetopofthereporttoenhanceitsprominence.ThereisnowarequirementinISAthattheengagementpartnersnamemustbedisclosed.Thisisof
littlesignificanceinSouthAfricaandmanyothercountries,wheresuchadisclosurerequirementisembeddedinlaw.However,itisnewtosomejurisdictions,notablyinNorthAmerica.
Theauditorsreportmustmakereferencetotherelevantethicalrequirementsthatrelatedtotheaudit.
Asignificantconsequentialchangeistheclarificationoftheauditorsreportingrequirementforotherinformationthataccompanythefinancialstatements(inSouthAfrica,typicallythe
integratedreport).Previouslytheauditorsreportwassilentastowhethertheotherinformationwasaudited,read,reviewedornotconsideredatallbytheauditor.Infuture,theauditors
reportwillclarifytheworkeffortonsuchinformationbeyondthefinancialstatements.
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INTENDEDBENEFITSOFTHECHANGES
TheIAASBlistsanumberofintendedbenefitsoftheauditorreportingproject.Theseareprimarilytheenhancementofcommunicationbetweenauditorsandinvestors,aswellasbetween
auditorsandauditcommittees(thosechargedwithgovernance).
Inaddition,itisenvisagedthatbothauditorandentitybehaviourwillimprove.AuditorswillhavearenewedfocusonmatterstobereportedasKAM,whichshouldincreasetheirlevelsof
professionalscepticism.OntheotherhandthepreparersoffinancialstatementswouldpossiblygivestrongerattentiontomattersthatauditorswillbehighlightinginKAMincrossreference
tofinancialstatementdisclosure,whichwillenhancethetransparencyoffinancialstatementsasawhole.
Allofthisshouldservethepublicinterestthroughenhancetransparency,higherauditqualityandtheimprovedinformativevalueofboththefinancialstatementsandtheauditorsreport,
whichinturnleadstoincreaseduserconfidenceinauditorreportsandfinancialstatements.
INCONCLUSION
Somemightbeoftheviewthatthesechangestotheauditorsreportwereunnecessaryandwillincreaseauditfees,despiteanobjectivenottodoso.Theinvestorgroupsthatparticipatein
theIAASBsConsultativeAdvisoryGroup,suchastheCFAInstituteandtheInternationalCorporateGovernanceNetwork,arguethatthesechangesarenonnegotiable.
ThechangesmadebytheIAASBtotheISAstoenhancethecommunicationvalueoftheauditorsreportrepresentasignificantstepforwardtoenhancethevalueoftheauditandthe
confidenceincorporatereporting.
Author:
LindadeBeerCA(SA),CharteredDirector(SA),ischairmanoftheConsultativeAdvisoryGroupoftheIAASB
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