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Shining a brighter light on risk

Enhanced auditor reports aim to improve understanding of financial statements, helping users better understand risks faced by companies.
Tuesday, August 2, 2016 - 05:50
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"The auditor will need to be confident and willing to share specific findings and conclusions in addressing key audit matters with a wider audience who may not be as sophisticated or well informed as their client." - Gautam Banerjee, chairman, Blackstone Singapore
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"From what we have seen so far, there are encouraging signs. Refinements though, in terms of the language, the format and more importantly the content, are to be expected over time." - Tham Sai Choy, chairman, KPMG Asia-Pacific, on early adopters having the potential to "set the tone" for the new standards
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"From our audit inspections, we observed that a considerable amount of experience and judgement is required to conclude on the key audit matters. - Julia Tay, deputy chief executive, ACRA, on auditors having to face their own set of challenges in implementing the enhanced standards
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"This will enable investors to understand the company's risk upfront as compared to reading the full annual report and performing their own assessments." - Shariq Barmaky, Chairman, Auditing and Assurance Standards Committee, Institute of Singapore Chartered Accountants, and regional managing partner, Assurance and Advisory, Deloitte Southeast Asia

BUSINESSES and auditors are preparing themselves for the introduction of enhanced standards that aim to boost market confidence by making auditor reports more transparent and easier to understand.

This comes in the wake of calls for more pertinent information for decision-making in an increasingly complex global business environment.

While there have been significant developments in financial reporting as a result of new accounting standards and disclosure requirements, the independent auditor's report has remained largely unchanged, industry players say.

"It is a standard binary 'boilerplate' document which, most of the time, says that the company accounts have either passed or failed," says Gautam Banerjee, chairman of Blackstone Singapore. "The traditional audit report is singularly unhelpful in providing any colour or context to the work that is carried out by the auditor."

He notes that users' understanding of financial statements would be considerably improved if auditor reports include comments by the auditor on the key risks and uncertainties facing the company, significant discussions between management, audit committee and the auditor, as well as areas of judgment exercised by the auditor.

The enhanced auditor reporting standards that was released by the Institute of Singapore Chartered Accountants (ISCA) last year attempts to achieve this. The new standards, which have been approved by the Accounting and Corporate Regulatory Authority (ACRA), take effect for audits of financial statements for periods ending on or after Dec 15, 2016.

According to ISCA, the standards are expected to reinvigorate the audit and change the manner in which auditors communicate their work in the auditor's report. "This will inevitably impact other stakeholder groups, including the preparers of the financial statements (CFOs and their finance team), the directors, the investors and the regulators," the institute said on its website.

One key aspect of the enhanced standards is known as key audit matters, which refer to matters that the auditors judge to be of most significance, with an explanation of how they were addressed in the audit.

"As a result, investors would be able to know the key areas of the audit and how they were managed by the companies. Investors would also be able to compare their areas of risks with those identified as key audit matters by the auditors," says Shariq Barmaky, Chairman, Auditing and Assurance Standards Committee, Institute of Singapore Chartered Accountants, and regional managing partner, Assurance and Advisory, Deloitte Southeast Asia.

For example, if a company has investments in certain countries where risks from a financial reporting perspective are higher, this could potentially be disclosed as a key audit matter.

"This will enable investors to understand the company's risk upfront as compared to reading the full annual report and performing their own assessments," says Mr Barmaky.

Early adopters

Even though the new standards do not take effect until January 2017, many auditors have already performed "dry runs" with their clients, reveals Julia Tay, deputy chief executive of ACRA. Several large listed companies in Singapore have even taken the lead to adopt the standards early.

"This signifies a strong commitment by both the companies and their auditors to enhance market transparency for investors' benefit. Lessons and experiences learnt from these early adopters would serve as a useful guide for the overall audit profession in Singapore," says Ms Tay.

ACRA has been working closely with ISCA and other professional and investor bodies to encourage early adoption of the new standards. Earlier this year, ACRA even invited an audit regulator from the United Kingdom to share their experience of successfully implementing enhanced standards with audit committees and auditors in Singapore.

Tham Sai Choy, chairman of KPMG Asia-Pacific, believes that early adopters have the potential to "set the tone" for the new standards.

"From what we have seen so far, there are encouraging signs. Refinements though, in terms of the language, the format and more importantly the content, are to be expected over time," says Mr Tham, who is also managing partner at KPMG in Singapore.

Challenges ahead

Industry players have warned that companies must be prepared for the challenges of adopting the standards. For instance, management will need to devote more time to audit matters as more company specific information, which may be sensitive, needs to be disclosed. All parties involved in the process will also need to agree on the wording that communicates the key audit matters.

Adoption of the standards may also result in more questions being raised at annual general meetings by shareholders in relation to key audit matters.

Auditors, too, will face their own set of challenges in implementing the enhanced standards. Foremost among these will be deciding which matters are to be included in the key audit matters, as well as communicating them in a language that is easy to understand while not disclosing information that is sensitive to the company.

"From our audit inspections, we observed that a considerable amount of experience and judgement is required to conclude on the key audit matters. Hence, we foresee that the audit firms will face challenges if they do not allocate adequate time and resources or involve the most senior auditors in discussing, agreeing and reporting of the key audit matters with management and directors," says Ms Tay.

Mr Banerjee says that the right balance will have to be struck in drafting the enhanced auditor's report so that there is enough context given to readers with different levels of knowledge for it to be meaningful, without the report appearing generic and standardised.

He adds: "The auditor will also need to be confident and willing to share specific findings and conclusions in addressing key audit matters with a wider audience who may not be as sophisticated or well informed as their client."