Moment of truth: New standards may force AASB to rethink stance

In this Audit Quality Blog post, Eric Turner, principal, Auditing and Assurance Standards, CPA Canada, wonders how the AASB will balance public interest vs. cost/benefit concerns around auditor reporting.

The Auditing and Assurance Standards Board (AASB)’s rigorous due process when adopting International Auditing and Assurance Standards Board (IAASB) standards for audits of Canadian financial statements is about to be put to the test.

As explained in an earlier blog post, the AASB was extremely troubled by some of the IAASB’s proposals. A major concern was that auditor reports for all listed entities must include key audit matters (KAM) that the auditor considers of most significance. The AASB noted that this requirement may be problematic for smaller listed entities and it asked the IAASB to allow national standard setters to decide which users would benefit most from KAM. That reporting flexibility, however, doesn’t appear to be forthcoming.

SCOPE OF FINAL KAM REQUIREMENTS UNCHANGED FROM DRAFT

Most Canadian stakeholders acknowledge there are benefits to Canadian Auditing Standards (CASs) being entirely consistent with International Standards on Auditing (ISAs). A lack of consistency can create friction for firms and confusion for users. For these and other reasons, the AASB is hesitant to amend ISAs. On the other hand, Canadian cost/benefit concerns about KAM for smaller listed entities are coming from many quarters, including auditors, preparers, audit committees, even the securities regulators, and some are calling on the AASB to amend the ISAs for Canada. How can the AASB achieve a balance between these two points of view?

Here are some observations:

  • Up to now, the AASB has ensured that the CASs are virtually identical to the ISAs and apply to all audits. In fact, we are one of the few countries to fully adopt the standard wording of the existing auditor’s report. Law and regulation in many other jurisdictions have required standard setters to take advantage of the ISAs’ flexible reporting options. The new standards may drive the AASB to rethink its stance if other jurisdictions can justify departures from KAM reporting. However, where jurisdictions end up may not be clear for some time.
  • Regulatory regimes for smaller listed entities vary. For example, in the U.K. the AIM market, a sub-market of the London Stock Exchange providing a more flexible regulatory system for smaller companies, is not subject to the more rigorous requirements that apply to entities subject to the U.K. Corporate Governance Code. In Australia, on the other hand, all reporting issuers are currently subject to the same auditor reporting requirements.
  • The U.S. Public Company Accounting Oversight Board (PCAOB) is considering its own auditor reporting proposals, similar to the IAASB’s. Although some respondents are advocating a phased transition — to allow smaller issuers and their auditors to benefit from the experiences of larger issuers — there is no indication that the PCAOB will agree. The PCAOB is analyzing responses to its proposals and drafting a re-proposal for consideration later in 2014.
  • Some suggest that audits of smaller listed entities often do not involve matters that need to be communicated as KAM. Many of them have limited operations and there are no matters that require significant auditor attention. Others, however, note that audit issues for smaller listed entities can be just as significant as those for larger entities (think Canadian entities operating in emerging markets). Where do you draw the line? Exempting KAM reporting based on size of the entity or if the entity is a venture issuer may preclude some investors from being informed about important audit matters that would be useful in making decisions.
  • KAM reporting will cost more but how much more, and is it really that significant? We likely won’t know until the standards have been implemented.

Over the next few months, the AASB will be considering the way forward for auditor reporting. It should be very illuminating as it moves closer to the moment of truth!

Keep the conversation going

How can the AASB balance public interest vs. cost/benefit concerns around auditor reporting?

Post a comment below; or email me directly.

Eric

CPA Canada’s Audit Quality Blog 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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