Just ahead of a U.S. proposal to revise the audit report, the international auditing profession is calling on auditors to provide commentary in their reports on issues they expect will be of greatest interest to users of financial statements, including whether the auditor has spotted material inconsistencies between financial statements and other information.
“This is the biggest proposed change in communication from auditors to the general public in 40 years,” says Jim Sylph, executive director for professional standards at the International Federation of Accountants. “We are going to a potential model where two very successful companies that are both very profitable and very viable in the same industry could have different audit reports. This is a big change.”
The International Auditing and Assurance Standards Board, which sets professional standards under the auspices of the International Federation of Accountants, is calling for comment on the board's preliminary thinking on how the audit report could be made more useful to investors in the aftermath of the global financial crisis. The discussion paper calls for a new section in the standard auditor's report called “auditor commentary,” where auditors would highlight issues they consider to be important to the users' understanding of a set of financial statements. The proposal also calls on auditors to include a statement on whether they identified any significant differences between the audited financial statements and other information they may have discovered during the course of the audit.
In the United States, the Public Company Accounting Oversight Boards is taking a hard look at whether it should make some similar changes to the audit report. The board published a concept release release last summer in preparation for a proposed standard expected this year to call on auditors to reveal more about what they learn during the audit that might be useful to investors. The PCAOB is considering whether to establish an “auditor's discussion and analysis” section in each audit report, or whether to facilitate more disclosure through "emphasis of matter" paragraphs that already are defined in auditing standards but are used infrequently.
IAASB Chairman Arnold Schilder says he expects the PCAOB's proposed standard to look and feel a great deal like the idea the IAASB is now outlining for discussion and comment. Both boards have heard “strikingly similar” comments on how to improve the current report, which provides no more than boilerplate language indicating whether the audit passes or fails, he says. “This is something global,” he says. “We have all heard a strong call from investors and other users of financial statements to have more information coming from the auditor. They would like to understand a bit more about what the auditor is discussing in the inner circle with the board and the audit committee.”
The IAASB's call for transparency focuses on the auditor commentary as a primary means by which auditors can call out issues to investors. The board also calls on auditors to reach and share a conclusion on management's assumption regarding the company's ability to remain in business and to make an explicit statement about any material uncertainties auditors identify related to the going concern assumption.
The proposal does not suggest something as extensive as the auditor discussion and analysis that the PCAOB has discussed, but it would be more akin to the PCAOB's focus on emphasis of matter paragraphs that would be added to the audit report, said Schilder. The IAASB's proposal provides some examples of the kind of commentary auditors might provide to meet the standard, but it is meant to be principles-based, providing little specific requirements about how auditors would craft their commentary. “It should about significant judgments, significant risks that have been addressed, or unusual transactions,” he says.
Dan Montgomery, deputy chair at IAASB, said that can lead to a lot of variety in audit reports. "We really hope these comments would be unique per audit, per entity,” he says.
The board is planning to hold roundtable sessions in New York on Sept. 10, in Brussels on Sept. 14, and in Kuala Lumpur on Oct. 8.