Paradigm shift in NZ auditor reporting

Now is the time for businesses, their boards and audit committees to get to grips with the new standards, which usher in a brave new world of long form audit reports designed to improve information visibility for investors.

Listed entities with an end of year reporting date, effectively December 31, 2016,  will be affected by the new rules, which will also apply to certain non-listed entities over time.  FMC reporting entities such as building societies, licensed insurers, credit unions and the like, which may not be listed but which plainly have levels of public accountability in their businesses activities, have two years to transition to the new rules. Early adoption is allowed.

The extent of the changes should not be underestimated. They have implications for investors, auditors, regulators, executive management and the director community, all of whom are involved in discussions in Wellington on Friday with the global standards chief architect, IAASB chairman Arnold Schilder. 

The new rules encourage a move away from sometimes meaningless boilerplate language, which is of questionable value to investors, toward enhanced and expansive communication between the auditor and board or audit committee of an entity – and ultimately investors.

At the heart of the reforms is a requirement for the inclusion of ‘key audit matters’ (KAM) in the auditor’s reports. Inclusion of KAM discussions will require the exercising of significant professional judgment and expertise. Currently, unless there’s bad news to report, most auditors' reports on financial statements provide little information specific to their clients. By bad news, I mean if there’s a material misstatement in the financial statements, which hasn’t been corrected or the auditors is unable to obtain the necessary evidence.

Other enhancements include requirements to disclose any material of uncertainty or “close calls” relating to going concerns, placement of the audit opinion first and the engagement partner’s name on the report, as well as further information on auditor’s responsibilities and independence.

Requiring long form reports should provide greater transparency and will open a dialogue between the parties that will be beneficial to the entity concerned, as well as investors.  There is a risk, particularly where matters of contention exist, that It will also introduce or engender a degree of tension between the entity and auditor. Auditors are caught between the investors’ desire for genuine insights and the reality that they can’t disclose anything that hasn’t been disclosed in financial statements.  That said, the profession has committed itself to improving communication with the investor community through these bold new proposals.

For the first time, through these new rules, we’re giving investors a window into the issues that keep auditors awake at night.  This has to be a good thing for investors, as well as also improving the public perception of auditors as independent arbiters of company accounts.

The changes address the crisis of relevance auditors are facing in 21st century capital markets and provide an opportunity for the profession to display their professional judgment and expertise – and even innovation.

The inclusion of key audit matters in the auditor’s report is a positive development, as the process of communication necessary to identify the KAM and agree the description in the auditor’s report with the audit committee is a worthwhile process in and of itself. Certainly boards and their audit committees will need to be engaged early in the process so that disclosures in the financial statements adequately reflect the auditor’s KAM, and vice versa.

If it works as intended, KAM will give an insight into the thinking and discussion that feeds into the audit and some insight into the influence which the auditor has had on the financial statements issued.

Investors will potentially have access to more meaningful information, while auditors will appreciate the increased importance of their role.

Alex Malley is chief executive of CPA Australia