According to a report on our sister site AccountingWEB .com researchers in the USA found that financial statements accompanied by audit reports with explanatory language are “significantly more likely” to be restated.
Under US Securities and Exchange Commission (SEC) rules public companies are only allowed to publish financial statements with unqualified audit opinions. As a result, explanatory language is the auditor’s “only practical mechanism to communicate risk,” the report states.
As the only visible risk difference between standard audit reports, explanatory language can be used to attract the attention of financial statement users if the auditor is uncertain about the information it contains.
The research highlights the difference in the approaches between the UK and the US financial reporting standards, according to AccountingWEB’s financial reporting editor Steve Collings.
“The US is very rule-based in terms of their financial reporting and auditing requirements, whereas we here in the UK are very much principles-based.”
For example, FRS 102 on which the new UK GAAP is based is not very prescriptive in a lot of areas, he explained.” So you’ve got to chip away at the edges and discern what is required when preparing the accounts. In many cases, you are going to have to use your professional judgement.
“To a large extent, we’re left to our personal professional judgements as auditors, unlike American auditors who are governed by the SEC’s more robust rules,” he said.
In the US restatements take place after the audit report has been issued. In contrast, UK auditors who discover material inaccuracies would normally discuss it with management to find a solution before writing the audit report.
“A qualified audit report is a last resort in most cases,” said Collings.
This principle-based approach is unpopular with some, he added, especially when the UK’s financial reporting standards are contrasted with the extremely prescriptive tax system.
There is something brewing over language use in UK audits, according to Collings. Under the IAASB’s key audit matters, coming into force for accounting periods from December 2016, an audit report in the UK will have to disclose what they judge to be the most significant matters in financial statements.
The objective is to make audit reports more user-friendly and transparent, for example in the way they deal with risk assessments and management estimates.
“In the UK, the audit report itself has been lambasted over the years because of all the jargon used in it. It’s not very user friendly,” said Collings. “So a lay person looking at a company’s financial accounts will probably not read the auditor’s report because the jargon is impenetrable.”
Unlike the US, the change is unlikely to prompt more restatements. But auditors are going to come under increasing pressure “to stop hiding behind jargon that no one outside of accountancy understands”, he added.
“It will force auditors tell all the interested stakeholders what they’ve done, to put it simply. They will have to start making things more transparent for the investors.”
