Members of ACCA Malaysia’s Public Practice Committee answer questions on the pros and cons of changes to auditor reporting
This article was first published in the October/November 2016 Malaysia edition of Accounting and Business magazine.
ACCA Malaysia’s Public Practice Committee (PPC) has welcomed the decision by Bursa Malaysia to make mandatory auditor reporting disclosures for listed entities, giving stakeholders access to analyses of business operations and financial results in annual reports.
The move will enhance the levels of transparency and corporate governance among companies listed on Bursa Malaysia, and provide in-depth information to guide investors making investment decisions.
PPC chair Manohar Benjamin Johnson says the impending changes enable auditors to demonstrate the value of an audit to a wider audience beyond the company’s management and audit committee.
The stock exchange’s move is based on the new and revised auditor reporting standards from the International Auditing and Assurance Standards Board (IAASB). These are intended to enhance the communicative value of the auditor’s report, provide greater transparency about the audit itself, and increase users’ confidence in the audit performed on the financial statements.
Among the key changes are requirements to report key audit matters (KAMs) and to enhance the information given in the report about an entity’s ability to continue as a going concern. The new auditor’s report will apply from the period ending 15 December 2016 onwards.
Accounting and Business interviewed PPC members Johnson, PPC chair and senior executive director, PwC Malaysia; Gary Huang, partner, Deloitte; Hoh Yoon Hoong, partner, EY; Yong Kam Fei, partner, RSM Robert Teo Kuan and Co.; and Michelle Yong, partner, Nexia SSY.
How should auditors view Bursa Malaysia’s amendments to the listing requirements to raise the standards of disclosure and corporate governance practices?
PPC: Anything that improves the corporate governance environment and structure is positive. If the requirements make companies think and improve internal controls, obviously that’s a good thing. But if they just create more boilerplate statements, then it’s not going to be useful.
From the auditor perspective, raising the standard of corporate governance is something to be welcomed because it is an added protection in the audit process.
What are the key benefits or drawbacks of this move?
PPC: The new disclosure requirements give stakeholders a wider perspective on the key developments or significant events that have taken place in the business in the current year.
It is important to note that KAMs need not focus only on negative matters but can also report on positive developments within the organisation that have had a beneficial impact on the business and its stakeholders.
How are audit firms planning for this with their clients?
PPC: Some firms have opted for face-to-face meetings, or forums, to share details about KAMs. Others plan to engage with clients by providing mock reports based on the 2015 audit and discussing how they might look for 2016.
Ultimately, there will be a greater level of detail in planning the timelines this year than in previous years. However, each client is reacting differently, with some even talking about delaying the year-end of the accounts to allow the management team more time to provide auditors with the required information.
What are the key issues relating to enhancing disclosures on going concern in the new auditor’s report?
PPC: Inconsistencies may arise when it comes to what is highlighted in the annual reports. For example, the chairman or CEO’s statement on the future of the business may paint a rosy picture while the auditor raises the matter of going concern in the same report. There will be increasing tension with the gap between the two images growing bigger. There has to be a middle ground; the auditor and the C-suite need to address the differences and reach consensus.
Financial institutions have expressed some concern that if auditors were to write too much on going concern, it might become a self-fulfilling prophecy, and lead to a run on the banks. It will be interesting to see how the banking fraternity respond to such disclosures.
Will the auditor take on a management role when communicating key audit matters?
PPC: If the audit committee or management are not forthcoming in their part of the annual report, when discussing certain significant events that have taken place, there could be a perception from the shareholders that the auditor is taking on a management role. But generally, we would not expect that to be the case.
Will the communication of KAMs publicly have an adverse effect on the relationship between the auditor and audit committee?
PPC: We can already see the conversations with audit committees getting a little bit more intense about certain of the phrases being used or what is considered a KAM. So if the auditor is writing on a contentious matter, say impairment, or perhaps litigation or going concern, more robust discussions should be expected.
Even if a matter raised by the auditor is finally resolved, it should be highlighted as a KAM and an explanation given of how it was resolved because even if it does not have any repercussions now, it might have in the future.
Will the auditor limit the number of KAMs communicated, or communicate more than necessary to avoid being second-guessed?
PPC: Not all issues raised by the auditor will be reported as KAMs. Even the standard prescribes that process. You basically consider all the matters and discussions that have taken place in the period and decide which are the most significant ones that you therefore want to report as KAMs.
How will the auditor deal with significant matters that may not have been publicly disclosed by the entity?
PPC: This will be a very real problem. If certain business deals are dependent on secrecy but yet are highly significant as far as the accounting impact is concerned, how much can you write without the management or audit committee feeling that you are giving away their secrets?
Will the more informative auditor’s report add more time and cost to the audit and financial reporting process?
PPC: Yes. This will inevitably involve more senior personnel time as it is not something that can be assigned to junior associates. It will likely involve the partners. And given that all firms have their own internal quality control and consultation process, there will also be additional time spent by the internal firm personnel in terms of pre-clearances or reviews, as well as formal consultations taking place. So that’s going to add to the time and cost of the audit.
But it is very important to note that there’s no significant difference in the audit procedure. The auditor is doing the same work as before. In the past, the auditor would have identified significant risks and communicated them to the audit committee and board and procedures would have been designed to address those issues. The additional costs and time required arise because now these issues will have to be put into report form. That’s the incremental time and cost.
Is there a link between the new auditor’s report and audit quality?
PPC: The audit work is still very much the same with or without the new auditor’s report, and hence the quality of audit is the same as before.
From an external party or shareholder’s perspective, there may be some incremental increase in the perception of improved audit quality. Perhaps for the first time, shareholders will get a sense of the type of work that the auditor does in specific areas.
What are the key considerations in identifying KAMs?
PPC: The auditor will intuitively know which are the KAMs given the involvement in the external audit process. The auditor will need to look at the matter’s relevance to the financial and non-financial implications – how will the KAM affect stakeholders’ decisions ?
Given that ISA 720 has been revised and will be reported on in the new auditor’s report under ‘Other information’, what are the potential challenges of this new standard?
PPC: It refers to anything other than financial information that is covered in the audit report. It is very wide. There has been much debate in terms of defining the scope and coverage. But at present there is no agreement.
MK Lee, journalist
"If the requirements make companies think and improve internal controls, obviously that’s a good thing"