This is way beyond the new requirements set out in ISA 700 (UK and Ireland) (revised), The Independent Auditor’s Report on Financial Statements, that are currently beginning to impact on financial statements.
The revised auditing standard requires auditors to set out in the audit report the key risks they have identified and how they responded to them, but it does not ask them to then explain what they discovered or how acceptable the policies, estimates or disclosures were.
KPMG UK head of audit Tony Cates says that the live field testing is “intentionally bold”. “If we truly want audit to make a difference, not only do we have to ask these challenging questions, but offer bold answers – daring to think differently.”
He adds that the move, which is part of the firm’s "Restoring Trust: Shaping the Future of Corporate Reporting” initiative, is intended to stimulate debate about whether reporting findings in audit reports should be part of the future of audit reporting.
“The debate needs to involve all the stakeholders, including the investor community as shareholders to whom audit reports are addressed, and company boards as the audit is a key part of the stewardship relationship between companies and their shareholders.”
Cates found the experience interesting, not least because distilling all the professional judgment that goes into an audit into a few words was “not always straightforward”.
“In particular, a binary finding – eg, that an estimate is acceptable – would be of little value; after all, that the estimates are acceptable is inherent in an overall clean audit opinion.
“Instead, what is required is graduated findings that say something about whereabouts in a range matters sit. And explaining an accounting estimate was simpler than the relative merits of an accounting treatment.”
KPMG has published the relevant section of the auditor’s report from both Rolls Royce and New World. In New World’s case, this reads, “We found that the third party expert was objective and had the appropriate experience and expertise to estimate the group’s closure and restoration provisions.
“We found the assumptions and resulting estimates to be acceptable but mildly optimistic resulting in a somewhat lower liability being recorded than might otherwise have been the case and that the group’s disclosures appropriately describes the significant degree of inherent imprecision in the estimates.
“We found no errors in calculations.”
Were the Financial Reporting Council to go down this innovative route, Cates warns, it would have to be careful in drafting the auditing standard to avoid standardising the report. What is needed is a framework capable of allowing comparison between companies.
“However, I should not seek absolute ‘grading’ consistency, which would be difficult to achieve: there is greater value in the application of professional judgment than in the result of a mechanical process.”