FINANCE: Clear, Tansparent Auditor Reporting – Will This Assist South Africa Maintaining Its Number One Ranki
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Clear, Tansparent Auditor Reporting – Will This Assist South Africa Maintaining its Number One Ranking for Audit and Reporting Standards
South Africa has been ranked number one worldwide for the strength of its auditing and reporting standards for a number of years by the World Economics’ Forum Global Competitiveness Report. The adoption of these standards by the Independent Regulatory Board for Auditors (IRBA) could well assist in maintaining South Africa’s number one ranking.
The new and revised Auditor Reporting standards released by the IAASB on 15 January after six years of development, comes amid increasingly vociferous calls from investors and other users of financial statements for more transparent, informative and relevant insights into the audits performed on publicly traded companies. These standards will be effective for audits of financial statements for periods ending on or after 15 December 2016.
“Business has over the last few years become more complex, and financial reporting has had to evolve, increasing the judgement, estimates and uncertainty underlying the financial statements. Deloitte believes these new and revised standards are an extremely important turning point for the auditing profession globally and will encourage early adoption,” said George Tweedy, Audit Risk Leader at Deloitte. “These standards will enhance the transparency of audits by elevating the conversations and debates that generally take place behind closed doors into the public domain. That will allow auditors to contextualise some of the numbers, which can only serve to enhance the credibility of the audit as well as the role that auditors play in the fair presentation of financial information that investors use to make decisions.”
Tweedy says public trust in financial reporting and corporate governance is at an historic low at present due to the slew of high profile bankruptcies and scandals that have taken place both before and after the 2008 global financial crisis. These corporate scandals include the collapse of Enron, often cited as the world’s biggest audit failure, as well as the bankruptcy of Lehman Brothers, once the world’s fourth-largest investment bank whose 2008 demise was caused by so-called “cosmetic accounting” and which played a key role in the unfolding world financial crisis that same year. Global banking giant HSBC has also recently attracted media attention with allegations related to purported secret Swiss bank accounts and tax evasion.
“The auditing process and the audit profession remains largely misunderstood by the general public, who don’t realise that there is often a lot of tough conversations and debate that goes on between auditors and company management,” said Ms Penny Binnie, Audit Partner at Deloitte. “According to the old standards, auditors were essentially able to give either a pass or fail mark to a company, which didn’t really facilitate absolute transparency in terms of the issues that were debated with the client. The new standards will provide much greater scope for auditors to voice their opinions on key audit matters, which we believe will allow for much more openness and honesty.”
Binnie says that the new and revised audit standards, which are expected to be adopted by our local regulator, IRBA, in May this year, will likely increase the length of a typical audit opinion free of qualifications from one page to four. However, the most significant enhancement in the new set of requirements centres on the auditors’ responsibility to communicate “Key Audit Matters”, or those aspects of a listed entity’s financial statements that the auditor views as most significant in the audit. The new standards also enhances the auditors role in reporting on going concern matters, including disclosures in the financial statements where material uncertainty exists, and requires more transparency in terms of disclosure around the audit process.
Tweedy and Binnie say that some of the areas that the new and revised standards could highlight include situations where an auditor believes the nature of a provision made by a company’s management is optimistic or cautious; and the value of impairments includes estimation uncertainty in the judgements and assumptions applied. Furthermore, they believe, although not required by the new and revised standards, that materiality should be disclosed in the audit report to give some context to the key audit matters discussed. Materiality is an auditing concept which relates to the degree to which the information in financial statements can be deemed inaccurate without influencing the opinion of an economic user of that information.
“In many of the judgements that an auditor makes there is no absolute answer,” says Binnie. “There is usually a range of answers and the nuances creep in when there is a difference of opinion in terms of where the auditors opinion lies versus that of management within that acceptable range. The new and revised standards will allow us to shed more light on these judgements.”
“We certainly believe that there is a lot of merit in being among the earliest adopters of these new and revised standards,” said Binnie. “This applies to us as a firm as well as clients and indeed, the South African auditing profession as a whole.”
Business News Sector Tags: Finance|