Adding credibility to the MD&A: What’s the cost/benefit?

As discussions continue on how to improve financial reporting and the value of the audit, there is increasing focus on whether auditors could add credibility to management’s discussion and analysis (MD&A).

As discussions continue on how to improve financial reporting and the value of the audit, there is increasing focus on whether auditors could add credibility to management’s discussion and analysis (MD&A). A discussion document from the Institute of Chartered Accountants of Scotland (ICAS) furthers the debate.

The MD&A is a key document for investors. Its purpose is to provide a narrative explanation, through the eyes of management, of how an entity has performed in the past, its financial condition, and its future prospects. Currently, the auditor does not provide assurance on MD&A. The auditor reads the MD&A for the purpose of identifying whether there are material inconsistencies with the audited financial statements and responds appropriately. Changes being proposed internationally aim to better explain this responsibility in the auditor’s report.

Investors may not realize that currently there is no independent questioning of whether the parts of the MD&A that are not taken from the financial statements are, for example, subject to “spin” or “bias”, or whether the assumptions and judgments in the MD&A are reasonable. To date, Canadians have not expressed strong views or concerns about this. However, ICAS states that investors have expressed a strong appetite for greater assurance around these questions. ICAS has been exploring how the profession could meet this need.

Because the traditional “presents fairly” audit opinion does not transfer easily when dealing with subjective and future-looking information, the discussion document proposes auditors give a positive opinion about whether the MD&A is “balanced and reasonable.” ICAS believes that a positive opinion is necessary to regain the trust and confidence of users and stakeholders. ICAS suggests that a balanced and reasonable opinion take the form of a new type of “medium” assurance engagement that would provide a lower level of assurance than given by an audit of financial statements, but greater than that provided by a review engagement. It is premised on the fact that auditors already have to audit information in financial statements based on forward-looking assumptions, so it might not be a great leap. The discussion document says “that it will require courage and confidence on the part of the auditor to be willing to commit to such assurance.” Will it ever!

Now this is not the place to discuss the technical challenges in reaching a position when auditors might actually do this type of engagement. It might require a fundamental reassessment of the international assurance framework. But it does raise some important questions in my mind:
  • Do users need assurance over information in the MD&A beyond the work that is currently done as part of the audit?
  • If so, would a “balanced and reasonable” assurance engagement meet those needs?
  • Will the benefit to users from this new engagement exceed the cost of the work required to provide it?
Answering these questions could be a huge step forward in determining whether the ICAS proposals are worth pursuing in Canada.

Keep the conversation going….do you think users need this type of assurance? Do you think auditors could provide this type of assurance?

Post a comment below; or email me directly.


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

About the Author

Eric Turner, CPA, CA

Director, Auditing and Assurance Standards, CPA Canada


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