Audit reports: what next?

05 June 2014 Comments (0)

In January, I commented on the first few long-form audit reports. It was a huge but exciting challenge
and we were already seeing some great examples. I also said that the real test would be whether the
reports caught the attention of the investment community the shareholders who are the ultimate
client and if they voiced their views on what is valuable and what isnt

With the December reporting season over weve taken stock and you can read about what we found in
our survey and economias New audit reports go down a storm with investors".

The highlight for me is the fact that audit reports are being read with real interest by investors. Its a
broad range of investors: those focused on governance are, of course, leading the field, but I also hear
that, for example, individual fund managers and buy-side analysts are showing a strong interest. They
are also being vocal about what they do and dont value, for example becoming discerning about the
quality of the auditors description of the risk and his work in response. Lastly, the reports have shed
transparency on audit coverage and materiality; the precursor to a valuable conversation on this topic.

Overall, I am enormously encouraged that the new audit reports are a trigger for better dialogue
between the audit profession and the investment community. This can only be to the good.

There is an elephant in the room: the new rules require reporting only on the audit risks and the
auditors response, but not the auditors findings
So far so good. But Im already thinking about where we go next. I flagged this question in January, but
now we need to answer it. For example, one of the challenges of the second year will be to keep it fresh.
Thats quite difficult if the audit risks at a company remain the same and its true to say that they
rarely change dramatically from year to year. The better reports this year were specific as to why the
issue was significant and that will add valuable colour year-on-year.

Yet there remains a risk that year two could look rather similar to year one. Hmmm. Perhaps there is
something that can be done to describe how the auditor identified the significant risks, provided it can
be kept specific rather than semi-standard.

However, in terms of what next? there is an elephant in the room: the new rules require reporting
only on the audit risks and the auditors response, but not the auditors findings. Why? I believe it is

better to talk about this, rather than pretend that the elephant isnt there. So with the agreement of
three of our clients we did a live field test of exactly that idea. In three reports we included our findings
on, for example, how acceptable were the policies, the estimates and the disclosures; expressed in a
graduated way rather than a binary, acceptable-vs-unacceptable way adding more colour. To
paraphrase one of our findings, shouldnt audit reports be more than mildly interesting?

Indeed, these reports have attracted keen interest amongst investors. It enables them to engage on
accounting issues, for example to seek and react to more transparency of accounting estimates and
judgements. Those that I have spoken to have certainly voiced their views that audit reports that include
findings are highly valued. I might even call a game changer. However, it has not yet become nearly so
much of a talking point among companies. That is a shame. Even though I can understand companies
caution which probably isnt wholly about the transparency itself, but also about its coming from the
auditor rather than from the company or its audit committee its vital that companies are involved in a
public debate with investors about whether this is the way forward.

The UKs FRC has led the world with this years audit reports. Even the New York Times recently ran a
piece praising UK audit reporting. And the FRC may be forced to go still further from 2016, subject to
interpretation, as the mint-new EU Audit Regulation (see our survey) appears to require findings in audit
reports the detail is being debated as the cellophane is removed. But for me that would be too late, an
opportunity missed, the momentum lost.

I believe that the FRC could continue to lead the EU and the world on whether and how to report
findings, based on a consensus of investors and companies. After all, audit is about facilitating
stewardship: the relationship between shareholders and the company. The FRC and audit profession
need to be thinking about what more we can do together to promote that.

- See more at: http://economia.icaew.com/opinion/june-2014/audit-reports-whatnext#sthash.mTjJKbKg.dpuf

http://economia.icaew.com/opinion/june-2014/audit-reports-what-next