Has anyone noticed the new audit reports?

  • Opinion
  • Saturday, 04 Mar 2017

THE first batch of the listed companies’ audited accounts for the financial year ended Dec 31, 2016, has been posted recently on the Bursa Malaysia website, and there’s something different about them.

They come with independent auditor’s reports presented in a revamped format that some have described as game-changing and insightful.

The biggest change is the introduction of a section on key audit matters (KAMs).

The International Standard on Auditing 701 contains the rules on communicating such matters in the auditor’s report.

Here’s how it defines KAMs: “Those matters that, in the auditor’s professional judgment, were of most significance in the audit of the financial statements of the current period.”

Most of us could do with a bit more help to better understand this. Despite the Best Picture mix-up at last week’s Oscars, it’s not a bad idea to turn to the big accounting firms for a simpler explanation.

PricewaterhouseCoopers says the KAMs section is “a window into what kept the auditor up at night”. Ernst & Young explains that KAMs are areas of the audit that demanded the most significant auditor attention. Similarly, to KPMG, there are areas that “the auditor worried about and focused on the most during the audit”.

Audited financial statements of listed companies for periods ending on or after Dec 15 last year will have the new auditor’s report.

According to Bursa’s listing requirements, a listed issuer with a December year-end has until April to submit its annual report, which includes the audited financial statements, and the auditor’s and directors’ reports.

But several early birds have already produced their annual reports for 2016. Bursa is among them. Others in that group include Bina Darulaman Bhd, LPI Capital Bhd, Public Bank Bhd, Tecnic Group Bhd and United Plantations Bhd.

Also, Dufu Technology Corp Bhd and Petronas Dagangan Bhd have released their audited annual accounts but not their annual reports yet.

There’s a tighter deadline for the issuance of the annual report of a real estate investment trust (REIT) or an exchange-traded fund (ETF) – two months after the end of its financial period. That means the REITs and ETFs with the December year-end would have to submit their annual reports by last month.

To date, there are almost 30 auditor’s reports with the KAMs section. In this section, the auditors not only highlight such matters, but also explain how they addressed these matters in the audit.

The aim is to make the auditor’s report more informative and to shed more light on what the auditors do and don’t do. Ultimately, the hope is that the enhanced auditor’s report will boost the perceived value of the financial statement audit.

But is it working out as intended?

It’s early days, of course, but it’s hard to talk about impact when few people seem to be aware that the auditor’s report now provides a lot more information. The media hasn’t given much coverage of this development and there’s no discernible buzz within the Malaysian investing community on this subject.

Aren’t the users of the audited financial statements interested in what the auditors have to say beyond the “true and fair view” opinion?

There needs to be public discussion on the usefulness of the new auditor’s report. The changes were supposedly formulated in response to what the market wants. But if people remain indifferent to the KAMs, it may well be that the standard-setters have misread the situation.

Hopefully, this is not the case.

The International Auditing and Assurance Standards Board says the changes to auditor reporting will improve the auditors’ communications with investors and those charged with governance.

The board also believes that these changes will result in management and directors paying more attention to the disclosures in the financial statements that are referred to in the auditor’s reports. And the board hopes that there’ll be renewed focus of the auditor on matters to be reported, which may heighten professional scepticism.

These are certainly desirable consequences. And the auditors can help by making sure that their reporting is truly informative and insightful as opposed to minimalist and boilerplate.

  • Executive editor Errol Oh is eager to read the auditor’s reports on the accounts of companies that are experiencing difficulties.

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