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Investors to gain greater insight with enhanced audit reports

"Auditors should be prepared to engage in upfront and more robust conversations with management and audit committees as they discuss key audit matters (KAMs)," Ms Rajah says.

COME 2017, Singapore investors can look forward to having greater insight into a company's financials.

Financial statements ending on or after Dec 15, 2016, will come with a more detailed report by the company's external auditors, which will shed light on the key audit matters (KAMs) encountered during the audit of a company's statements.

"This will give investors access to more information on specific, critical areas in a company's financial statements," said Senior Minister of State for Law and Finance Indranee Rajah in late August on the impending change.

"With this information, they will be able to engage more actively with directors, management and even auditors at shareholders meetings," she added.

The new audit reports will build upon the current one-page reports by auditors on whether a company's financial statements have passed or failed the audit.

There will be two key changes.

Firstly, auditors will have to communicate the KAMs encountered in their audit - areas they have assessed to be of greatest significance during the audit, such as significant risk areas of the financial statements most susceptible to misstatements, the company's major transactions during the year that required extensive auditing efforts, or areas involving key management judgements and estimates such as the valuation of investments.

The auditors would also have to explain how these issues were addressed in the audit. Now, KAMs tend to be confined to discussions that take place between the auditor, the company's management and its audit committee.

The second change relates to the aspect of going concern, that is, the ability of a company to continue its operations. At present, auditors need to flag in their reports any circumstances - such as loss of a major customer - that could result in a material uncertainty over the company's going concern.

Auditors will soon have the added responsibility of ensuring that the company has made adequate disclosures in its financial statements regarding management's judgement and assessment on going concern, even if the circumstances do not result in a material uncertainty - for example, the loss of a major customer being mitigated by secured orders from other customers.

This is to ensure more transparency on a company's viability.

These changes are expected to help investors focus on the significant risk areas of the company, enabling them to better engage directly with auditors and raise more in-depth questions for management and directors during shareholders' meetings.

It would also encourage company directors and management to become more transparent in their engagements with shareholders, helping them to provide more insightful responses to queries raised and improve the quality of those disclosures.

To help investors here better understand and appreciate such changes, Ms Rajah said last month that the Accounting and Corporate Regulatory Authority (ACRA), the Institute of Singapore Chartered Accountants (ISCA) and the Securities Investors' Association (Singapore) or SIAS are working together on a guide for investors to explain the disclosures under the enhanced auditor's report.

"The guide will also help investors understand how they can use these enhanced audit disclosures to obtain greater insights into the company's financial statements," she said.

The guide is slated to be issued early next year, in time for the next cycle of annual general meetings (AGMs) traditionally held in March and April.

Ms Rajah also took developments one step further, and urged directors, audit committees and company management to respond to these changes with "more insightful disclosures".

"Likewise, auditors should be prepared to engage in upfront and more robust conversations with management and audit committees as they discuss KAMs, in particular, how the KAMs would be described and eventually communicated in the auditor's report."

The changes are the result of strong calls - not just in Singapore, but worldwide - by investors and users of financial statements for more pertinent information to be included in the auditor's report to augment their decision-making.

Independent standards setting body, the International Auditing and Assurance Standards Board (IAASB), first issued standards for such enhanced auditor reporting in January 2015 to national audit regulators and professional bodies for localised adoption.

A recent survey of institutional and retail investors in Singapore also found that investors were looking forward to the greater transparency and improved interactions with the audit committees; 96 per cent of those surveyed said they think the audit committee should provide a commentary to shareholders about their views on the significant accounting issues highlighted as KAMs.

The study, "Into the Minds of Investors: Investors' Views of Financial Reporting, Audit and Corporate Governance", was commissioned by ACRA and ISCA and authored by associate professor Mak Yuen Teen of the NUS Business School.

David Gerald, founder and president of investor watchdog SIAS, said the impending change is "good particularly for retail investors, who may not have the resources like institutional investors to perform detailed analyses and research".

In addition to the guide SIAS is working on with ACRA and ISCA, Mr Gerald said that the investors' association will also continue to work closely with ACRA to educate its members on how to use and leverage the enhanced auditor's report.