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December 5, 2012

Improving the Auditor’s Report

The International Auditing and Assurance Standards Board’s (IAASB) recent paper, Improving the Auditor’s Report makes a strong case for change in the way auditors communicate. Research and consultation with stakeholders, including the users of audited financial statements, has led the IAASB to declare that "the status quo is not an option".

The auditor’s report has, in the past, been one of the least complex sections in a set of financial statements. In its current form it provides what is effectively a ‘yes or no’ answer to the question of whether stakeholders can reliably use the information therein for decision making.

However, the IAASB envisages a shift in the role of the auditor: from primarily a provider of assurance on information disclosed by entities to an originator of information about those entities, and a guide to help users navigate through the complexity of financial statements.

The strength of the IAASB’s positioning on this matter presents the quandary of an opportunity for genuine change, together with considerable risk. Helping users to navigate complex financial statements is a noble aim, which plainly requires knowledge of users’ needs and purposes. But how intimately can auditors be expected to understand the needs of individuals among increasingly diverse groups of stakeholders? Reaching too far without a sufficient regulatory and conceptual groundwork to underpin a changed auditor reporting model could exacerbate the issue of complexity.

It is germane to consider the auditor’s role in the context of changing reporting models – including developments in International Financial Reporting Standards and steps toward an integrated reporting framework – both of which are tackling similar issues to those raised in the paper.

The IAASB has published a broad spectrum of views on the auditor reporting proposals: from support to clear opposition. There are some surprises in the names represented on both sides of the argument – a welcome shake-up and clear departure from a sense of group-think and attachment to the status quo.

There is great opportunity to enhance the value and relevance of audit through the bold steps that the IAASB are taking. It is almost a certainty that there will be widely divergent views, concerns and a raft of teething issues. As Michel de Montaigne famously said, however, "There is no conversation more boring than the one where everybody agrees".

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