Do you know about the shares you invest in?

Posted on March 29, 2016 by ATB Chartered Accountants

How much do you really know about the shares you invest in? Given the sheer number of listed companies, it is difficult to do your own personal research on which companies to invest in. For this reason, individuals tend to base their investments off of annual company reports, and audit reports on profit. But, how do you know that the audit reports you’re reading are telling you what you want to know?

New audit processing rules in 111 countries around the world aim to provide more transparency, clarity and insights for investors and stakeholders. These countries have committed to adopting these new audit processing standards stipulated by the International Auditing and Assurance Standards Board (IAASB), which have been planned to ensure auditor’s reports are more informative and transparent.

This improved reporting style has already been adopted in the UK since 2013, and the Netherlands from 2014, and now countries across the Asia-Pacific including Australia are set to implement the same standards by 15 December 2016.

NEW AUDIT PROCESSING RULES

As a quick summary, the changes to the audit processing rules can be seen below; Auditors must:

  • Begin their reports with an explanation of how they reached their outcome
  • Provide thorough annotations on key audit matters
  • Provide improved reporting on matters of concern, including a description of responsibilities, and underlining any concerns
  • Include a formal statement that they are independent, and have satisfied all ethical duties
  • Deliver or reference an explanation of the auditor’s responsibilities and key features of the report.
A SHOCK TO REPORTING

The main reason behind this audit processing change began when the IAASB asked a range of investors for feedback, where it was uncovered that most of them wanted to see more transparency throughout the process. Since then, a number of revisions have been made to the international audit processing rules, including the largest change that requires auditors to list Key Audit Measures (KAMs) for listed companies. KAMs include high risk matters that require extensive considerations by management, or significant events and transactions in a company. Auditors should be explaining why these areas in a company are being focused on, and how they are being addressed within the audit.

Overall, change means that audit reports will be much more specific to the individual, rather than a standardised and highly repeated text explaining the outcome of the audit, rather than how they came to the conclusion.

INCREASING THE VALUE OF AUDITS

It is relatively easy to see how these new audit processing rules will benefit investors and the auditing community. Auditors will be given the opportunity to present their value, and the significance of their judgements to clients, as well as the complexity of the issues they deal with. As well as this, increased transparency will allow stakeholders to put greater trust in their auditors, as they will be able to see the value of the auditor’s reports and how it can benefit them.

AUDITOR’S UNDER MORE SCRUTINY

With this increase in transparency means that auditors are likely to face increased scrutiny, and so they will have to choose their words very carefully in order to dodge any legal disputes or preventable conflict. The reason for this is the new audit rules are giving auditors the opportunity to have input with their own perspectives of the matter, and so these greater insights must be addressed appropriately.

PREPARING FOR THESE CHANGES

Although the proposed changes are not being implemented until December, there is no reason as to why auditors shouldn’t begin making these changes now. As well as having a good understanding of what will be required of them, auditors should be able to discuss with their clients how the new audits will look so they are able to agree on new timelines for the reports to be generated if need be, and also to ensure that everyone is on the same page in relations to these new changes. By communicating these changes with stakeholders and companies, auditors will find that their clients will be much more willing to advance with the proposed changes. This has already been found by Cochlear, Downer EDI, and ASX, all whom have taken initiative to incorporate these new rules into their companies already.