New auditor’s report will improve transparency and clarity as economic crisis continues to plague companies
Johannesburg, South Africa – September 2015 – With the after-effects of the recent financial crisis still felt, moves towards an improved standard of clear and transparent auditor reporting are gathering pace globally.
According to the new standards as developed by the International Auditing and Assurance Standards Board (IAASB) and prescribed by the Independent Regulatory Board for Auditors in South Africa, auditors of listed companies will be required to communicate those matters that were of most significance in the audit of the financial statements.
Deloitte’s New Auditor’s Report panel discussion on Friday, 11 September heard that while the amended auditing standards would be effective for years ending on or after 15 December 2016, a couple of major companies in South Africa will be “early adopters”.
The changes are already becoming a reality in SA with Imperial Holdings Limited and Attaq announcing the release of their full annual financial statements, which included the first enhanced auditor’s report issued in South Africa by Deloitte as their external auditors.
Prof Arnold Schilder, Chairman of the International Auditing and Assurance Standards Board commented on Deloitte’s early adoption and the enhanced audit report issued. ”The early adoption of the new auditor reporting standards is commendable. In particular notable are the various conclusions in the key audit matters. Stakeholders will really like this information.”
Deloitte believes that the new audit reports will facilitate robust dialogue between management, the auditor, those charged with governance of the company and investors.
“We, together with the audit committee, believed that transparency and clear communication to the shareholders is a priority and we therefore embraced this opportunity, albeit early, to communicate directly with the users of the report about those areas of the audit where we focused our effort, in order to provide the user with the assurance that those matters have been thoroughly considered and addressed”, Geoff Pinnock, Managing Partner of Africa Audit at Deloitte said.
While extended auditor’s reports have been in place for some time in the United Kingdom and other parts of Europe, this is a momentous occasion for the auditing profession in South Africa.
Imran Vanker, Director of Standards at the Independent Regulatory Board for Auditors, congratulated all the parties that participated in pioneering the new auditor’s report. “The new audit report is a response to investor demands. The report presents audit messages, in a manner that will attract the attention of investors. The clarity, transparency and detail contained in the new auditor’s report will generate a platform for enhanced engagement between auditors and those parties that are interested in the audit report. This is an extremely positive development that will benefit the entire industry. Careful planning, pilot projects and stimulating investor engagement around the new auditor’s reports will raise the bar and ultimately help all companies and their auditors gear up for the coming changes,” he said.
The Deloitte panel discussion heard that experience in the UK market, where there, reports have been issued over the last 12 months, was that these improved the quality of risk reporting and were a valuable tool for stakeholders to improve their understanding of the risks faced by the company. The reports also confirm to users that auditors were focussing on areas perceived as risky by investors.
Andrew Mackie, Partner at Deloitte said there were still a few challenges that needed to be overcome in the new reporting journey, most notably the identification and communication of “key audit matters” especially where such a matter was not disclosed in the financial statements.
“The point is to focus on a few key matters in the context of the entity and the audit. Describing these in a succinct and understandable manner, while keeping it relevant, will be crucial,” said Mr Mackie
In the UK, the Financial Reporting Council (FRC) has already introduced similar requirements that became effective for September 2013 year-ends and which require the auditor to communicate the audit risks which had the most effect on the conduct of the audit, the scope of the audit work including responses to audit risks and materially.
In conjunction with these changes, the audit committee is required to report on the significant issues it considered in relation to the financial statements and how these issues were addressed, while management is responsible for disclosing the critical judgements formed and key estimates they made in preparing the financial statements.
However, in the UK, it was realised that this requirement should not just be about providing a list of a large number of risks. “We want to see that judgement is applied and companies have been asked to report on the principle risks,” said CEO of the FRC, Stephen Haddrill.
With South African companies gearing up to implement similar changes, it is important that stakeholders in the UK have given the changes the thumbs up.
“The crucial thing is investors have really valued those extended audit reports as they gave insight into what the auditor was doing and was worried about. It is reassuring to know that someone is dealing with concerns that matter to investors,” said Mr Haddrill.
He said the changes had ushered in “quality dialogue rather than aggressive argument” and sensible dialogue about what gets reported.
“It has empowered the auditor in the discussions with the board and has done so in a constructive way. It has underpinned this change in the audit environment that has been introduced.”
Dr Len Konar, a past chair of the ministerial panel for the review of accountants and auditors in SA and a member of the King Committee on Corporate Governance, said early adoption of the changes would give companies “room to manoeuvre”.
“Companies need to start building on it and getting managers to engage more with auditors. It is good that some companies are already adopting the changes,” he said.
He said the understanding of “top risks” – the granularity of risks – would be important and that this would need to be approached in a transparent manner.
“I would like to exhort all audit committee chairs to take a more proactive role. I really believe chairs of audit committees need to engage and have a continuous engagement with the audit partners,” he said.
Dr Konar recommended companies develop a pro forma document for key audit matters. “But we need to be realistic when looking at certain items, like valuing goodwill or financial instruments,” he said.
William Touche, an audit partner at Deloitte’s London practice, said additional communication around the role of the auditor would open “the black box” of those opaque issues in statements which should now be explained more effectively. “This gives auditors an enhanced status and role in the capital markets ecosystem,” he said.
But Mr Touche did not believe there were “any surprises” in what was discussed by auditors in their reports
“But what is clear is that drafting these reports is not easy. Auditors will need to think carefully about every word used,” he said. What would be critical was that a robust assessment of principle risks would have to be made by directors and auditors.
“The first focus in the UK was improving the quality of risk reporting and this was quite a shift. In the UK market, companies now need to have a view on the future sustainability of their organisations The journey of the financial crisis is turning discussions in the annual report it more into a report about the future as well as the previous year,” he said.
A longer-term viability statement takes into account the risks the board sees and how they will be mitigated over a period of years looking forward. According to Mr Haddrill, the company chooses that length of period as it must be specific to the nature of the business. Companies in the UK are mostly looking at a three year outlook.
“The auditors’ role is beginning to look forward now, as opposed to reflecting on the past with increased perfection. We must tell the story of how a company run with a factual lens and if not everything is according to plan, the story must say why there are additional things to do,” he said.
Mr Pinnock closed the conference saying: “Driving consistent and high-quality audits is our number one –priority at Deloitte and this journey we are on will really help, especially as it enhances communication between the auditor and users of the information. Users have demanded improved transparency for some time – improved transparency increases trust”.