ISAE 3420, assurance reports on the process to compile pro forma financial information included in a prospectus

Comments from ACCA to the International Auditing and Assurance Standards Board (IAASB), September 2010.

General Comments

ACCA welcomes the opportunity to comment on the proposed International Standard on Assurance Engagements 3420 Assurance Reports on the Process to Compile Pro Forma Financial Information Included in a Prospectus (the proposed ISAE) issued by the International Auditing and Assurance Standards Board (IAASB) of the International Federation of Accountants.

In finalising the proposed ISAE it is necessary to take account of finalisation of a revision to International Standard on Assurance Engagements 3000 Assurance Engagements Other Than Audits or Reviews of Historical Financial Information, in order to ensure that overlap and consequential duplication is minimised, or at least properly justified in relation to the needs of any particular type of engagement. Subject to this, we are generally supportive of the proposed ISAE which we believe will be useful in many capital markets although we recognise that, for pragmatic reasons, the IAASB has used the prospectus regime in the European Union (EU) as its basis.

We support the use, in the proposed ISAE, of the clarity drafting conventions developed for the International Standards on Auditing.

We agree with the decision to focus the proposed ISAE on the process rather than the pro forma financial information (PFI) itself, as there are considerable conceptual problems associated with assurance on what can be regarded as hypothetical figures.

We agree with the objectives of the practitioner at stated in the proposed ISAE. Alternative wording is provided for illustrative reports in order apparently to address the specific requirements in the EU. However, we are aware that some regulators may not accept anything other than the wording prescribed in European legislation and would suggest, therefore, that the manner of expression of the assurance be left to be determined by law and regulation where that is necessary.

We see no difficulty with using the term 'compile' (or 'compilation') in relation to two different engagements and believe, therefore, that the proposed ISAE is correct in its approach to terminology. We do not see a need for paragraph 3 of the introduction as its mention of International Standard on Related Services 4410 Engagements to Compile Financial Statements may introduce user uncertainty where none was present.

Matters on which specific questions are asked
In this section of our response we answer the questions posed in the explanatory memorandum forming part of the exposure draft.

Question 1
In relation to respondents' roles and responsibilities, would respondents adopt or apply the proposed ISAE, or request an engagement in accordance therewith, if it became effective? If not, please explain why (in this regard, respondents are asked to also consider question 4 below).

As an accountancy body, ACCA is not in a position to adopt, apply or request an engagement in accordance with the proposed ISAE. Accordingly, we do not answer this question.

Question 2
Do respondents believe that the work effort set out in the proposed ISAE is sufficient and appropriate to enable the practitioner to express an opinion as to whether the process to compile the PFI has, in all material respects, been applied in accordance with the applicable criteria?

We believe that the work effort set out in the proposed ISAE is sufficient and appropriate to allow the practitioner to achieve the objectives set out in paragraph 9 thereof.

Question 3
Do respondents believe that it is clear from the illustrative practitioner's report in the Appendix to the proposed ISAE that the practitioner is reporting on the process to compile the PFI and not on the PFI itself? Paragraph A52 of the proposed ISAE, in particular, provides two alternatives for the opinion in relation to the process, ie

  • Whether the process to compile the PFI has, in all material respects, been applied in accordance with the applicable criteria; or
  • Whether the PFI has been properly compiled on the basis stated.

We find the illustrative practitioner's report to be clear that no assurance is conveyed concerning the pro forma financial information itself. We suggest that the proposed ISAE should have added to it an explanation as to how the elements of an assurance engagement (as described in The Assurance Framework), have been dealt with. This should, in particular explain how the proposed ISAE treats 'subject matter information' when management makes no explicit assertion concerning the successful application of the process in accordance with the applicable criteria. This is particularly important where the written representations from the responsible party (in paragraph 24) deal separately with aspects of an assertion.

Question 4
As the proposed ISAE is designed to convey assurance on the process to compile the PFI, do respondents believe that it would be desirable for the IAASB to also develop a separate standard on reporting on the PFI itself? If yes:

  • What do respondents believe would be the work effort implications in undertaking engagements to report on the PFI itself? In particular, how would such work effort differ from that specified in the proposed ISAE?
  • Should both reasonable assurance and limited assurance on the PFI be addressed? If so, how should the nature and extent of the practitioner's work effort be differentiated between a reasonable assurance engagement and a limited assurance engagement to report on the PFI?

The need for a standard dealing with assurance on the pro forma financial information itself should be assessed by reference to the demands of regulators and others.

Were such a demand to be identified, a jurisdiction may wish to have reporting on the PFI itself as an alternative to reporting on the process; alternatively, there may be a desire to have a report on both the process and the PFI. Such circumstances may give rise to duplication and inefficiency in the standards. If a separate standard on reporting on the PFI is the only standard adopted in a jurisdiction, procedures relating to the process should be included in that context rather than through modified application of the proposed ISAE.
If the jurisdiction wanted to have assurance on the process and on the PFI itself, separate standards could be adopted but would likely result in duplication. It would be better to have a standard dealing with both aspects of assurance.

Other matters
The IAASB has expressed interest in comments from the perspectives of issuers, investors and regulators and comments in relation to:

  • any difficulties of application in a developing nation environment
  • translation a planned effective date for the standard 18 months after its approval

We comment on two of these matters below.

ACCA members in developing nations where reporting on PFI is not fully developed, have indicated that the proposed ISAE is a useful benchmark, notwithstanding its focus on the regime for issuers in the EU.

We are in agreement with the planned effective date being 18 months from the date of approval of the resulting ISAE. Earlier adoption should not be forbidden.