Assurance could help restore business trust

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Auditors could develop a whole new service line for UK companies, checking that all the information in annual reports is reliable, says ICAEW

Today sees the new requirements for UK companies’ narrative reporting in the “front half” of the annual report come into operation, including the new strategic review and information about human rights, diversity and greenhouse gas emissions.

At the moment there is no obligation for companies to have the information checked externally, although an increasing number of companies are seeking the comfort of an assurance review.

“There is increasing emphasis worldwide on the first half of annual reports and how they can equip investors and other stakeholders with information on which to base decisions,” said Robert Hodgkinson, ICAEW technical director, said. “But the big question is whether this information is trustworthy.

Extending this assurance to the full report could in the future become a vital part of making buiness information more trustworthy

Robert Hodgkinson

“There is a trend towards companies requesting assurance on other elements of the annual report – beyond the traditional auditor report on the financial statements – to help add credibility to information that matters to markets.

“Anything is possible. Extending this assurance to the full annual report could in the future become a vital part of making business information more trustworthy.”

ICAEW has set up a narrative assurance working party to look at the issues involved. Membership is drawn from the business and investor communities as well as audit firms.

The working party has published a paper, The Journey: Assuring All of the Annual Report?, setting out its initial observations and intends to follow it up with a longer report, exploring the issues in greater detail.

The working party believes that assurance on the annual report, going beyond the audit of the financial statements, is essential in restoring trust in business information. In the paper it sets out a scenario where a single assurance report extends the audit opinion to cover the whole of the annual report.

There are challenges to be overcome, however, before “omni-assurance” can be realised. These include: agreeing what the UK’s new “fair, balanced and understandable” reporting requirement means in practice; deciding what information is material and so should be included in the annual report; and working out how to support forward looking information with evidence.

Hodgkinson says that ultimately the demand for “omni-assurance” will be determined by the market but points out that there is value in a service that bolsters investor confidence in companies’ annual reports. “Getting an independent experts perspective on the systems and controls behind business information should in itself be valuable to companies.”

Developing assurance for annual reports is a sensible move, says KPMG. Partner David Matthews believes it is an anomaly that some of the information most valued by investors is subject to the least scrutiny. 

However, he warns against regulation to mandate greater assurance over the front end of annual reports. “Regulation can be a blunt tool if not wielded carefully.  We would rather see a demand-driven solution – it’s time for investors and stakeholders to tell us what would give them the greatest value.

“If companies are prepared to make the investment to improve the transparency and quality of narrative reporting and the robustness of the processes that generate it, it is reasonable to expect auditors to make that journey with them, providing assurance over the output to investors.” 

Julia Irvine

 

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