Saturday, 17 December 2016

Will New Auditor KAM Deliver Promises?

With effect from Dec 15, 2016, reports issued by auditors on financial statements would not be the same again.
Not only the arrangements of the contents are changed, but auditors are also expected to share more about their audit, including Key Audit Matters (KAM), which would provide more insights regarding critical issues in their audit.
Matters relating to going concern would also be dealt differently as this subject is one of the fundamental assumptions in the preparation of financial statements.
The journey towards the operationalisation of the new standards had been long and challenging.

It started immediately after the global financial crisis, where again people were questioning, why companies collapsed after unqualified audit reports on their financial statements were issued. This resulted in the accounting profession and the International Auditing and Assurance Standards Board (IAASB) exploring the possibilities of audit reports to have more information regarding the audit instead of the simplified approach of the present pass or fail model.
The Financial Reporting Council (FRC) went ahead and issued its own version of auditing standards in the UK, perhaps as a quick measure in protecting London as the capital centre of the world.
Immediately, the form and shape of audit reports in the UK changed and more information, analysis and observation were shared although the pass or fail model is retained.
Perhaps, one of the more outstanding auditor report was issued by KPMG LLP on its audit of Rolls-Royce Holdings plc, which provided readers of the key risks around the business and how the auditors responded to those risks in their audit.
However, given that was the first set of audit reports under the new standards, the language used was very cautionary and sometimes require readers to refer to a dictionary for meanings. Nevertheless, this report was considered as the one which represents the breath of fresh air brought by the new auditor reporting standards.
On the other hand, across the Atlantic, the Public Companies Account ing Oversight Board (PCAOB), which has mandate to issue auditing standards for auditors auditing public companies in the US is still at the consultation stages. Given the nature of litigation there, sharing more about audit means both clients and auditors could face higher chances of court actions, something which is not intended when the auditor report is changed. With the changes in the US administration, this project could also be affected.
There are subtle differences between the FRC and the IAASB standards which may influence the effectiveness of the IAASB standards. While auditors in the UK are required to discuss how they have dealt with materiality, a threshold which is very important in any audit, there is no such requirement by IAASB.
Both standards require auditors to share about KAM, however, the FRC standards require auditors to report how they have responded to those issues whereas the IAASB standards require auditors to report on the procedures which they performed. It appears that FRC requires auditors to apply more judgement in deciding how much they need to share regarding their responses to KAM, while the IAASB has narrowed the scope to audit procedures only. Let’s see whether we would be able to have “Rolls-Royce” report when the new standards are implemented in Malaysia.
Auditors need to plan well ahead on how the requirements of these standards would be met, especially in drafting auditor reports. Since each firm would have to develop their own house-style, more partners and senior auditors are expected to be involved in this process. Many firms, by now, had shared with their clients how the new standards be applied to KAM of last year’s audit.
If you are on a board of a public-listed company and your auditors have not done so, you better get them to do so, the soonest to avoid any last minute surprises.
It is expected that KAM would be around judgements which the companies made in applying financial reporting standards such as those involving valuation and impairment of assets. However, if KAM reported by auditors start to cover issues around risks and effectiveness of controls, that could signal something which are more serious.
In anticipating the implementation of the new reporting standards, the listing requirements of Bursa Malaysia Securities Bhd had been amended requiring immediate announcement of KAM which relate to going concern issues.
Listed companies are also required to announce their responses to those KAM and the timelines during which those issues would be resolved. Quarterly reports would need to have updates of these matters. While not directly requiring KAM to be addressed in the report of audit committee, they are now required to address matters which would likely be raised as KAM.
Given the efforts and intention of getting audit reports to be more informative and help shareholders in making their investment decisions, auditors and the accountancy profession have the responsibilities to make this work. The tone set by regulators would also influence the effectiveness of implementation.
The first few reports issued under the new auditing standards would provide us some ideas of how much the landscape would change.
This article was also published in The Malaysian Reserve
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