New auditing standards to help regain trust in the profession

The new and revised standards are expected to have a profound impact on corporate governance and the accounting profession. iStockphoto.com

Without trust, there can be no growth. Although the auditing profession has played a significant role in establishing trust for centuries, in the wake of the global financial crisis, concerns have been raised about relevance and the value of auditors’ work.

While our work allows us to express opinions on the fairness of financial information presented to stakeholders, we also gain significant insights into the business and operations of the companies we audit. But these insights never reach the users of financial statements, because our opinions are binary in nature. Either pass or fail.

These factors coupled with ever evolving stakeholder needs have resulted in calls for enhanced auditor reporting. In response, the International Auditing and Assurance Standards Board has introduced new auditing standards, requiring auditors to add more information. This standard will become effective from December next year in the UAE and auditors of all listed companies will have to comply with the standards.

Viewed as a first step towards enhancing auditor reporting, the new and revised standards are expected to have a profound impact on corporate governance and the accounting profession.

Without changing the scope of an independent audit, these new requirements open doors for the auditor to give users more insights into the audit and improve transparency. The new report will help to enhance communications with stakeholders and should raise the value of audits in their eyes.

Without wishing to get too technical, the most significant changes focus on key audit matters (KAMs) of listed companies. KAMs are the areas that an auditor worries about the most during the audit.

Auditors have been given a framework to help determine what is a KAM, including areas where auditors encountered difficulties, circumstances which changed the planned approach, and matters identified as significant risks or involving significant auditing judgment. Auditors are now required to include KAMs in their audit reports. This will clearly enhance the value of the auditor’s report by providing greater transparency.

The revised standard on goingconcerns, which applies to all audits, is also a welcome change. A company’s auditor is now required to evaluate the adequacy of any disclosures in the financial statements with regard to going concern in a much more robust way than before.

In 2013, our UK colleagues in KPMG tested a bold idea: in three new, long-form audit reports, we reported not only the risks and our response but our findings as well. This attracted widespread interest. It’s been a talking point among investors and has become a recurring theme at a public meeting about the future of US auditing.

If companies and their shareholders are positively engaged, governance and long-term investment will benefit.

The annual accounts and the audit report ontribute to that relationship by helping to place it on a solid foundation of trust. It is clear from the positive feedback that findings make a significant additional contribution to that trust.

In my opinion, these new and revised standards should be welcomed as they will enhance the value of reporting to the shareholders and add credibility.

This will work as a catalyst to fresh thinking. The new audit report will tell stakeholders what the auditor found. It will explain clearly how we brought our independent mindset to bear on the key issues we identified. It will improve readers’ ability to identify and understand the significant judgments made in preparing the financial statements. It will act as a basis on which shareholders might further challenge executive management and hold the audit committee and external auditor to account.

Greater understanding should contribute to an effective stewardship relationship between management and investors and hopefully enhance trust, ultimately reducing the cost of capital for the company and increasing the value generated.

Muhammad Tariq is a partner at KPMG Lower Gulf in Dubai.

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