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Auditors should say more in financial reports

Steve Maslin explains why auditors should embrace stakeholder demands for greater auditor commentary in financial statements

22 Oct 2012

By Steve Maslin, Grant Thornton

Auditor feedback concept image

IN MY PUBLIC POLICY ROLE at Grant Thornton I engage with institutional investors across the globe and one message comes back loud and clear - they value the assurance provided by the audit but want to find new ways to gain assurance from auditors to increase their confidence in financial statements and related information.

Perhaps the most pressing demand is to increase the usefulness of the audit report itself. While there are many challenges, this is an opportunity for the profession to step up and find ways through those challenges to help the audit evolve to meet new user needs.

In June, the International Auditing and Assurance Standards Board (IAASB) issued an invitation to comment on Improving the Auditor's Report. The current paper goes much further than previous consultations, and describes the IAASB's indicative direction proposed for the future auditor's report. It also presents an illustration of what a possible new auditor's report might look like.

The crux of the IAASB's stance involves a proposal that "auditor commentary" should be included in the auditor's report. As described by the IAASB, auditor commentary should be additional information in the auditor's report that would "highlight matters that are, in the auditor's judgment, likely to be most important to users' understanding of the audited financial statements or the audit."

This is unquestionably an important consultation document. Not only is it a bold response by the IAASB to investor thinking, auditor reporting is also a focus of both the US Public Company Accounting Oversight Board (PCAOB) and the European Commission's auditing proposals.

Simply put, while the current auditor's report is valued, stakeholders around the world - particularly investors - want more. Stakeholders want to retain the current "pass/fail" report but many want it to go further. Investors believe that auditors have important information about the company and the audit, and they want that information passed along. The IAASB has captured the attention of the public. As of 18 October, there have been 150 responses to the ITC.

It is now up to auditors to decide whether we want to support the IAASB's objectives in their efforts to improve the auditor's report, or whether we want to maintain the status quo and raise obstacles.

Grant Thornton has chosen the former option. We believe that the IAASB's approach will result in the auditor's report providing more relevant information to the users of financial statements. We have also suggested additional steps and actions the IAASB could take to further improve the auditor's report. For example:

1. I support the concept of auditor commentary, and there should be a section in the auditor's report that has the clear purpose of providing transparency about matters that are, in the auditor's judgment, likely to be most important to users' understanding of the audited financial statements. In due course this might be extended to providing more information about the audit.

Indeed, the IAASB could respond more quickly to the users' call for change by amending ISA 706 on a priority basis. This will encourage the use of emphasis of matter and other matters paragraphs in auditor reporting rather than the current situation where emphasis paragraphs are rare. I am concerned that focusing solely on new standards for auditor commentary could take too long to finalize. Therefore,  the IAASB should also focus on amending its existing standard on emphasis of matter.

2. Change must also come from other organisations and parties. I support a holistic approach to the process by which companies report results, one that is synchronized with improvements to financial reporting and corporate governance more broadly. Therefore, the IAASB should increase outreach activities with the IASB and IOSCO, specifically to encourage IOSCO to establish an international regulatory disclosures framework that supplements the disclosures required by accounting frameworks. We believe that accounting frameworks will not, in and of themselves, meet the users' information needs about the entity.

3. The IAASB should "back test" the proposals to specific cases experienced during the global financial crisis. This approach would help the IAASB, and other participants in the financial reporting supply chain, measure the effectiveness of the proposals and set priorities.

An important by-product of a successful implementation of the IAASB's proposals (eg more useful signposts for users rather than more boiler plate) should be that individual audit teams cthe an be evaluated with regard to their effectiveness, currently a challenge for audit committees and investors alike.

In summary, the time is right for change, and stakeholders are demanding it. We should not underestimate the challenges that will be faced in moving to an expanded auditor's report. For example, the board and management must still be the source of original information about the company, otherwise users are likely to be confused further by conflicting information. However, the auditor can certainly do more. This is an opportunity for the profession to embrace change, to show investors and stakeholders that we are listening, and to improve the auditor's report.

Steve Maslin is a partner at Grant Thornton and is head of external professional affairs, having been the firm's head of assurance services for seven years

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