Auditors through the looking glass…should they be involved beyond financial statements?

Several global initiatives are now underway to explore issues like creating additional transparency in the audit process and how auditors could better serve the needs of investors.

In the fallout from the global financial crisis, some have criticized the “disconnect” between what was reported in some companies’ annual reports and the companies’ subsequent failure or liquidity crisis. The question people want answered is: who’s to blame? 

Although auditors are not seen as having caused company failures during the crisis, measures to address weaknesses in the financial system are focusing attention on all key contributors to sound financial reporting, including auditors.  Several global initiatives are now underway to explore issues like creating additional transparency in the audit process and how auditors could better serve the needs of investors.

To delve into these questions and open up the discussion in Canada, the CICA and the US Centre for Audit Quality recently held a roundtable consultation involving investors, audit committee and board members, company CEOs and CFOs, and auditors.

The consultation centred on whether there is merit in expanding auditor association with management disclosures outside of the financial statements, such as Management’s Discussion and Analysis, quarterly earnings releases and interim financial statements.

Here are some highlights of the discussion:

  • There was general agreement that as information needs evolve, including calls for environmental, social and governance reporting, the profession needs to explore how auditors can add credibility to that information.
  • Stakeholders said that they would value access to auditors’ views about such things as management’s choice of accounting policies, critical accounting judgments and the quality of accounting at the company.
  • There was good discussion about whether auditors should be asked to comment on a company’s risk factors. Views were mixed because identifying which risk factors are key and ranking their priority is difficult, and auditors do not have the same level of information as management about a company’s risks. However, some believe that auditors could add value by sharing their broad knowledge of risks facing industries with the audit committee and management.
  • Little support was expressed for auditor association with earnings releases. Participants noted the variability and subjectivity in the content of earnings releases and the significant costs that might be incurred by auditors to provide assurance around these. There would also be time constraints in conducting the work.

You can view the full summary of the ”Role of the Auditor Roundtable Discussion” here.

Keep the conversation going…what do you think about auditors being involved with information beyond the financial statements? E-mail me

Eric

Conversations about Audit Quality is designed to create an exchange of ideas on global audit quality developments and issues and their impact in Canada.


This was originally published by one of CPA Canada’s legacy bodies.

About the Author

Eric Turner, CPA, CA

Director, Auditing and Assurance Standards, CPA Canada

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