FRC calls for better front-end reporting

The Financial Reporting Council (FRC) has flagged up concerns about auditors’ work on the information in the front end of company reports, which it says does not meet the requirements of auditing standards consistently and should be given greater focus

In its first detailed review of this area. the regulator assessed the work of six audit firms: the Big Four, plus BDO and Grant Thornton.

It looked at how they handled assurance of the other information (OI), defined as all financial and non-financial information included in an entity’s annual report other than the financial statements and the audited parts of the directors’ remuneration report. The review focused on those aspects where the auditor has specific reporting responsibilities.

While the FRC identified instances of good practice in the audits that it reviewed, it says there were too many instances where insufficient work was performed to support the statements made by auditors in respect of the OI in their audit reports.

The regulator said inconsistency in the extent and quality of the work in part reflects the non-prescriptive requirements in the audit standards. Firms’ own guidance to their auditors also lacks prescription, which has led to varying approaches being taken to this work, even by different audit teams within the same firm.

The size of the company did not appear to be a factor, as there was variation across all categories of companies (FTSE 100, FTSE 250 and other premium listed) included in the review.

Amongst the issues reported, there was no evidence of an explicit assessment performed by the directors to support the viability statement on five of the 30 audits reviewed. The FRC also noted some instances of discrepancies, that had not been identified by the audit team, between the risks and scenarios included in the company’s viability assessment and those disclosed in the viability statement.

Identical forecast information was frequently used to assess viability, going concern and impairment testing. The appropriateness of using the same information, without any adjustments, was not considered by audit teams in most cases. The nature and extent of the challenge of the key assumptions underlying the forecasts and related stress testing were also mixed.

The report stated: ‘Whilst auditing standards may not be prescriptive, revisions made to them in 2016 raised the bar in terms of the work auditors were expected to perform on the OI. The FRC consulted extensively with firms on these changes and their implications.

‘Despite this, it is clear that audit teams have not responded consistently to these additional expectations and that the revised standards have not been fully effective in achieving the objectives set for them.’

 The FRC therefore proposes to look again at these as part of the FRC’s post implementation review of the 2016 standards.

Mike Suffield, acting executive director for audit at the FRC, said: ‘Auditors must improve the extent and quality of the work that they perform on the front end of the annual report. The FRC will review the requirements on auditors in this area in auditing standards, as part of its current project reviewing auditing standards, to see what changes are necessary to help improve the work carried out.

‘We will also consider in detail the requirements for assurance over information included in the front end as part of our recently announced project on the future of corporate reporting.’

The FRC said that changes to standards and related guidance alone will not result in the necessary improvements in the quality and consistency of the work on the OI unless firms also drive improvement in a number of areas.

These include undertaking more targeted procedures, including templates and workbooks, based upon more prescriptive guidance from audit firms; placing greater emphasis on their review of key non-financial information; and increasing their scepticism and paying more attention to the completeness of information, particularly in relation to principal risk disclosures and their linkage to viability statements.

The FRC says audit firms should also require boards to prepare, on a timely basis, appropriate documentation to support key areas of the OI such as the viability statement, and ensure staff with appropriate experience and knowledge to identify potential material misstatements and inconsistencies are assigned to review the OI.

Audit quality thematic review: Other information in the annual report is here

Report by Pat Sweet

Be the first to vote