While presenting the The Economist 2014 CFO Summit, IFAC CEO Fayez Choudhury spoke with Lianna Brinded of the International Business Times on the evolving role of chief financial officers.

Note to Editors: This article is available for IFAC member organizations to publish in their journals and/or websites. Email permissions@ifac.org for access and copyright information.

Professional accountants in practice are frequently looked upon as trusted business advisors. This relationship stems from their significant breadth of business experience combined with detailed knowledge of their clients’ businesses, much of which is obtained in the process of performing assurance engagements on their clients’ financial statements. Professional accountants are therefore in a unique position to add value, both in terms of enhancing the credibility of their clients’ financial statements and being able to provide them with tailored business advice.

The International Auditing and Assurance Standards Board (IAASB) has issued International Standard on Review Engagements (ISRE) 2400 (Revised), Engagements to Review Historical Financial Statements, which is now effective for periods ended on or after December 31, 2013. Review engagements provide a limited form of assurance on historical financial statements and may be a cost effective and value-adding alternative when an audit is not required.

Adding Cost-Effective Value to Clients

A review, consisting primarily of inquiry and analysis, is based on the professional accountant’s understanding of the entity and its environment and the applicable financial reporting framework according to which the financial statements are prepared. This understanding includes relevant industry, regulatory, and other external factors; the entity’s operations, ownership, and governance structure; how it is financed; and its accounting systems and records. The professional accountant uses this knowledge to design and perform inquiry and analytical procedures on both material items in the financial statements and on those items where material misstatements are likely to arise. In the course of the engagement, the practitioner develops a significant understanding of the client and its business, which gives him/her an excellent opportunity to offer additional value to the client through the provision of bespoke advice.

Practitioners can provide review services most efficiently by staffing a review engagement with professionals competent in assurance skills and techniques, consistently using the same staff members, and making use of technology to automate the mechanics of the engagement wherever possible. As so much of a review consists of effective communication with clients, performing a significant proportion of the work at the client’s place of business is preferable.

Adding a Meaningful Level of Assurance to Financial Statements

In accordance with ISRE 2400 (Revised), a review engagement is not just about practitioners obtaining knowledge of their clients through questions and analysis; it also requires the accountant to dig deeper and obtain additional evidence if it is determined there may be a material misstatement in the financial statements. Additional procedures are also required when further questions arise, such as if related party transactions fall outside the normal course of business, fraud or non-compliance with laws or regulations is suspected, or doubts arise regarding the entity’s ability to continue as a going concern. This additional work effort allows for the meaningful and valuable level of assurance conveyed by the review conclusion.

Under ISRE 2400 (Revised), the practitioner is required to comply with relevant ethical requirements, including those pertaining to independence in the International Ethics Standards Board for Accountants’ Code of Ethics for Professional Accountants (IESBA Code), or national equivalent requirements that are at least as restrictive. The review standard also requires professional accountants to exercise professional judgment and to be skeptical throughout the engagement.

Benefits for All Parties Involved

In summary, there are benefits for all parties involved in an ISRE 2400 (Revised) review engagement. Practitioners will obtain the knowledge base to enable them to add value to their clients’ businesses while expressing the assurance conclusions needed on annual financial statements. Clients and other financial statements users will have the comfort of a meaningful level of assurance provided by an objective and independent professional accountant.

A Guide to Reviews for Practitioners and IFAC Member Bodies

The newest guide from the IFAC SMP Committee, the Guide to Review Engagements, is intended to help IFAC member organizations and their members in practice, especially small- and medium-sized practices (SMPs), with the implementation of ISRE 2400 (Revised). To help practitioners develop a deeper understanding of a review engagement conducted in compliance with the standard, the guide includes illustrative examples alongside relevant extracts from the standard. It also includes practical points for practitioners’ consideration, tips on how to efficiently implement the standard, and checklists and forms that practitioners can adapt to meet the requirements and circumstances in their particular jurisdiction.

IFAC Resources

Visit the SMP area of the IFAC website to access this and other guides. While the guide includes relevant extracts from ISRE 2400 (Revised), the complete standard is available in the 2013 IAASB Handbook (see also the At a Glance).

• Guide to Review Engagements

Additional articles:

• Review Engagements for SMEs: Limited Assurance, Numerous Benefits
• The Standard for Limited Assurance Review Engagements

Join the discussion and stay informed! Follow the SMP Committee on Twitter (@IFAC­_SMP) and LinkedIn (IFAC SMP Community). Look for additional relevant resources under Audit & Assurance, coming in April 2014 to the IFAC Global Knowledge Gateway.

In addition to their traditional roles as financial gatekeepers, chief financial officers (CFOs) and others in related finance leadership roles are now expected to participate in driving organizations toward achieving their objectives. As part of organizational leadership, CFOs are expected to increase their support of strategic and operational decision making in a “business partnering” capacity, in addition to fulfilling traditional stewardship responsibilities relating to governance, compliance, and control.

Seeking a global debate among professional accountancy organizations, employers of professional accountants, and other stakeholders on the key implications for the education, training, and development of professional accountants, the IFAC Professional Accountants in Business (PAIB) Committee recently released The Role and Expectations of a CFO: A Global Debate on Preparing Accountants for Finance Leadership as a starting point.

The Discussion Paper establishes a principles-based framework for understanding the changing expectations, scope, and mandate of the CFO and related finance leadership roles. The initiative seeks to capture the key requirements of the CFO role and highlight what professional accountants need to do to prepare for leadership roles in finance; support professional accountancy organizations (PAOs) and employers in their efforts to prepare professional accountants for career progression to finance leadership; and highlight the benefits of a professional accountant serving as the CFO.

IFAC encourages a global dialogue involving a broad range of stakeholders, including PAOs and employers, who prepare accountants for finance leadership; regulators, who are striving for well-governed organizations and market integrity; and professional accountants, who need to consider how to develop the necessary competences for finance leadership, such as through appropriate education and experience, as well as lifelong learning.

IFAC seeks responses and perspectives on five key questions:

• What are the main requirements and expectations of CFOs and finance leaders?
• What are the implications for skills and competency needed?
• What are the key actions for PAOs and employers to prepare professional accountants for finance leadership?
• What are the main factors for professional accountants to consider in striving for finance leadership?
• What might regulators and other stakeholders do to influence the professionalism of finance leadership?

The Discussion Paper supplements outreach through various forums to facilitate discussion and closer relationships between professional accountants, PAOs, employers, regulators, and other stakeholders, the first of which was the Global PAIB Forum in Beijing, China, on October 16, 2013, hosted by the Chinese Institute of CPAs. 

Respondents can also submit their comments electronically through the IFAC website, using the “Submit a Comment” button on the Discussion Paper page (in Publications & Resources). An At a Glance and Resources are also available.

Note to Editors: This article is available for IFAC member organizations to publish in their journals and/or websites. Email permissions@ifac.org for access and copyright information. 

An ­­­audit is probably the most common form of assurance worldwide but it’s not the only one, and in some cases, it might not be the right one. Small- and medium-sized entities (SMEs) are often not required by legislation to have an audit. Lacking the complexity of their larger counterparts, an audit doesn’t necessarily make sense for an SME, and the costs may outweigh the value added for these small operations. There are other forms of assurance that may be more cost-effective and better suited to meet their needs. SMEs can look to their accountants and their statement users to help them determine what level of assurance on their financial statements is most appropriate.

A review engagement, for example, is another form of assurance that can meet the needs of some SMEs without putting an undue strain on time and other resources.

What is a Review Engagement?

A review is a limited assurance engagement. It provides less assurance than an audit but more than a compilation engagement, which offers no assurance. The International Auditing and Assurance Standards Board (IAASB) revised International Standard on Review Engagements (ISRE) 2400, Engagements to Review Historical Financial Statements, in 2012. ISRE 2400 (Revised) is designed not only to provide an effective and consistent level of limited assurance on financial statements but also to allow for efficient delivery of the service proportionate to the complexity of the statements reviewed. The revised standard includes strengthened requirements and additional guidance to promote a clearer understanding of the nature of a review engagement.

Merits of a Review Engagement

SMEs that are not required by law to have an audit may still want some level of independent assurance to increase the credibility of their financial statements, for example, when seeking a loan from a bank. In these cases, a review can be an ideal solution. Additionally, since the work effort involved in performing a review engagement is generally less than that in conducting an audit, a review should be a more cost-effective option while still involving the financial reporting expertise of an independent professional accountant.

When to Conduct a Review Engagement

Under ISRE 2400 (Revised), a review engagement may only be performed when it both serves a rational purpose and is appropriate under the circumstances. An engagement without a rational purpose, for example, is one in which management unreasonably restricts the practitioner’s inquiries to specific individuals. A review may not be appropriate, for example, for complex entities, such as banks or insurance companies, for which inquiry and analytical procedures alone may not reduce engagement risk sufficiently. In these cases, an audit or a compilation engagement may be more appropriate.

Where Can I Learn More?

The IFAC Small and Medium Practices (SMP) Committee has developed a comprehensive guide to help IFAC member organizations and their members in practice, especially SMPs, understand and implement ISRE 2400 (Revised). The Guide to Review Engagements is planned for release in December 2013, which is also when the updated standard goes into effect (effective for periods ending on or after December 31, 2013).

Practitioners can use the guide to develop a deeper understanding of a review engagement conducted in compliance with ISRE 2400 (Revised) through explanation and illustrative examples. The guide also includes a number of appendices with key checklists and forms that practitioners can adapt to meet the requirements and circumstances in their particular jurisdiction.

Note to Editors: This article is available for IFAC member organizations to publish in their journals and/or websites. Email permissions@ifac.org for access and copyright information. 

The acquisition of new clients continues to be a dominant driver of profitability for small- and medium-sized practices (SMPs). Indeed, in the latest edition of the IFAC SMP Quick Poll, the largest portion of respondents identified acquisition of new clients as the main driver of practice profitability—by a wide margin (see chart below).

While SMPs understand the importance of improving operational leverage (doing more with less), improving productivity (e.g., changing work practices or introducing technology), reducing overheads, and better utilization of assets, these are not the main drivers of profitability for most SMPs. This is not surprising given the fact that practice overheads are relatively fixed.

The poll results seem to question the wisdom of many practice management “gurus” who say that the cost of acquiring a new client is far higher than the cost of retaining, or selling more services to, an existing client. What those “gurus” may be failing to recognize is the full potential and cost effectiveness of a marketing campaign that includes low-cost social media.

This article looks at promotion and marketing and, in particular, the role of social media in acquiring new clients and driving practice profitability. 

Branding

The first step of a marketing strategy is to identify your target customers and what they need. You then have to determine how you can satisfy those needs at a profit and, at the same time, differentiate yourself from your competitors. This becomes your brand. The aim of your marketing strategy is to have people associate your brand with their needs and desires, choose you over the competition, and, if you do it right, pay a premium for your services.

Promotion and Marketing

An organic growth strategy involves leveraging promotion and marketing activities to build brand and attract new clients or sell additional services to existing clients. Remember that most businesses in the market are likely to already have an accountant. In the majority of cases, that means for you to grow your practice you will need to win clients from rival practices. And, in order to do that, you must offer a compelling reason for them to switch. This makes promotion and marketing more important than ever—and demands that practices build the capability to proficiently promote and market their brand and service offerings. You will likely be faced with the classic “make-or-buy” dilemma, that of using (and training as needed) existing staff to do promotion and marketing, or else recruiting or outsourcing for the requisite skills.

Promotion and marketing efforts are most effective when a number of activities and channels are used simultaneously: this harnesses the momentum of such efforts and is likely to be more impactful. There are many “tried and true” strategies for marketing but the newest one, social media, has already broken the mold. Social media marketing has rapidly grown in prominence and gone from marginal to mainstream in the marketing space. Social media is a low-cost channel with a very wide reach into your target market.

Social Media Marketing

Social media essentially has taken traditional word-of-mouth marketing (historically the norm for accountants) and moved it to a digital space, exponentially increasing opportunities to influence. It is one of the most powerful tools to engage customers and drive revenue growth. But according to Steven D. Strauss, small business expert and author of The Small Business Bible, while small business owners recognize how important social media is to their success, they’re not taking advantage of social media’s full potential.¹ And, chances are, the same applies to SMPs: after all, SMPs are effectively small businesses in the accountancy sector.

Getting started in social media marketing and deciding whether it can benefit your practice can be quite overwhelming—even scary, at first. Here are some steps to take when building a social media presence:

1. Set aside preconceived notions—social media carries risks but the rewards are greater: it will take time and expense to plan and execute but there are many tools, resources, and articles to help.
2. Learn about the what, why, and how—take the time to read and educate yourself about social media, including Twitter (see Twitter’s Small Business Guide), LinkedIn, Facebook, and blogging, and see what your peers are doing.
3. Check out the tools and resources available to help—there is a growing suite of tools, resources, and guidance available, for example, the AICPA PCPS has developed a number of resources, many of which are available for free, including a social media toolkit and articles.
4. Create a strategy and action plan—define goals, decide how you will measure success and allocate responsibility, then start out small by, for example, pilot testing one of the tools. See “10 Questions to Ask When Creating a Social Media Marketing Plan.”
5. Implement the plan—aim to provide content that creates conversation rather than advertises and involve staff from the millennial generation as they often have the most experience.
6. Periodically evaluate, analyze, and update the plan—track your efforts and monitor the return on investment using common metrics including likes, shares, followers, traffic, and conversions.
7. Consider the need for a policy—this can help manage the risks and reap the rewards.

Resources

IFAC’s website hosts a range of resources and tools to help SMPs grow their practices, especially the Guide to Practice Management for Small- and Medium-Sized Practices).

This article was originally published in the December 2013 issue of Chartered Accountants Journal, published by the New Zealand Institute of Chartered Accountants.

As the government's lead economic and financial advisor, the Treasury of New Zealand has a particular focus on ensuring state-level public sector performance improves living standards. Setting clear expectations and producing relevant and reliable accountability information is critical to this.

For its work in preparing fiscal forecasts and financial statements, and in assessing departmental performance, the Treasury relies on information provided by other government departments and agencies. In order to evaluate the adequacy of this information, the Treasury performs assessments to ensure that the internal controls used by information providers are operating effectively.

As the Treasury sought to refresh its approach in this area, it chose to embed the International Good Practice Guidance, Evaluating and Improving Internal Control in Organizations, published by the International Federation of Accountants (IFAC), into its internal control and financial management assessment tool, CIPFA TICK.[1] With permission from IFAC, the Treasury adapted the guidance to help departmental and agency risk committees and senior management respond to results that were outside predetermined tolerance levels. That is, the Treasury doesn’t expect perfect results but we do expect results will be within the risk appetite level of senior management.

The IFAC guidance seeks to facilitate the evaluation and improvement of existing internal control systems by highlighting a number of areas where the practical application of existing internal control standards and frameworks often fails in many organizations. Because the Treasury wants to be alert to such issues, this guidance is, therefore, very relevant for public sector organizations in New Zealand.

The Treasury tool is an electronic questionnaire that seeks assessments against each of the nine principles identified in the IFAC guidance. The survey is completed annually by approximately 500 budget holders, internal auditors, finance staff, and senior managers across New Zealand’s public sector. The first year’s results, for the year ending June 30, 2013, are publicly available online.

Although the Treasury and other central agencies have been reassured that internal control systems are currently adequate for reporting objectives, the survey results have also highlighted challenges.

• There is a low level of maturity in integrating objectives, risk management, and internal controls. Work is ongoing to develop and improve expectations and assessments of risk management.
• Updating risk management processes and responsibilities has proved a burden for departments that have been restructured recently. This has reinforced the importance of central agencies paying greater attention to departments undergoing significant change or restructuring until new performance levels are normalized.
• Delivering value for money is a common objective for many public sector organizations, but it is not easily measured. This has undermined accountability, which has led to a widespread lack of meaningful responses to substandard performance in this area. Central agencies currently have several projects in place in the performance reporting and management area. The survey has emphasized the importance of these initiatives.
• Some senior management teams lacked consistent leadership on risk management; internal control was also not always being consistently reinforced. The departmental performance assessments processes are drawing attention to these concerns.

Through this refreshed focus on assessing the effectiveness of internal controls, the Treasury has been able to collect more useful performance information for department management and achieved cost savings in the process. A summary of the survey results, as well as an analysis of the responses, can be found on the Treasury website.

Ken Warren is the chief accounting advisor at the New Zealand Treasury and a member of the International Public Sector Accounting Standards Board (www.ipsasb.org).

This article originally appeared in the China Accounting Journal, published by the Chinese Institute of CPAs.

When asked what accountants do, responses often mention roles such as tax agents and independent auditors. The functions performed by the vast number of professional accountants who work in businesses are often forgotten and not well understood.

What do the independent director, the internal auditor and the chief financial officer of companies all have in common? The individuals in these positions could all be professional accountants working in businesses. Besides these roles, professional accountants take on a vast array of other roles in businesses of all sorts including in the public sector, not-for-profit sector, regulatory or professional bodies, and academia. Their wide ranging work and experience find commonality in one aspect – their knowledge of accounting.

The importance of the role of professional accountants in business in ensuring the quality of financial reporting cannot be overly emphasized. Professional accountants in business often find themselves being at the frontline of safeguarding the integrity of financial reporting. Management is responsible for the financial information produced by the company. As such, professional accountants in businesses therefore have the task of defending the quality of financial reporting right at the source where the numbers and figures are produced!

Like their counterparts in taxation or auditing, professional accountants in business play important roles that contribute to the overall stability and progress of society. Without public understanding of all these diverging roles and responsibilities of different accounting specialists working in business, public perceptions of their value may be misinformed.

Roles of Professional Accountants in Business

A competent professional accountant in business is an invaluable asset to the company. These individuals employ an inquiring mind to their work founded on the basis of their knowledge of the company’s financials. Using their skills and intimate understanding of the company and the environment in which it operates, professional accountants in business ask challenging questions. Their training in accounting enables them to adopt a pragmatic and objective approach to solving issues. This is a valuable asset to management, particularly in small and medium enterprises where the professional accountants are often the only professionally qualified members of staff.

Accountancy professionals in business assist with corporate strategy, provide advice and help businesses to reduce costs, improve their top line and mitigate risks. As board directors, professional accountants in business represent the interest of the owners of the company (i.e., shareholders in a public company). Their roles ordinarily include: governing the organization (such as, approving annual budgets and accounting to the stakeholders for the company’s performance); appointing the chief executive; and determining management’s compensation. As chief financial officers, professional accountants have oversight over all matters relating to the company’s financial health. This includes creating and driving the strategic direction of the business to analyzing, creating and communicating financial information. As internal auditors, professional accountants provide independent assurance to management that the organization’s risk management, governance and internal control processes are operating effectively. They also offer advice on areas for enhancements. In the public sector, professional accountants in government shape fiscal policies that had far-reaching impacts on the lives of many. Accountants in academia are tasked with the important role of imparting the knowledge, skills and ethical underpinnings of the profession to the next generation.

Protectors of Public Interest

A description of the multifaceted role of professional accountants in business is not complete without discussing the duty that the profession owes to the general public. As a profession that has been bestowed a privileged position in society, the accountancy profession as a whole deals with a wide range of issues that has a public interest angle. In the case of professional accountants in business, not only must they maintain high standards but they also have a key role to play in helping organizations to act ethically.

Closely link to the protection of public interest is the notion that public accountants need to be trusted to provide public value. Accountants will lose their legitimacy as protectors of public interest if there is no public trust. The accountancy profession has wide reach in society and in global capital markets. In the most basic way, confidence in the financial data produced by professionals in businesses forms the core of public trust and public value.

Competing Demands

Accountants often times face conflicts between upholding values central to their profession and the demands of the real world. Balancing these competing demands speaks to the very heart of being a professional in contrast to simply having a job or performing a function. Professionals are expected to exercise professional judgment in performing their roles so that when times get challenging, they do not undertake actions that will result in the profession losing the public’s trust as protectors of public interest.

Ethical codes for professional accountants globally compels professional accountants, regardless of the roles that they perform, to uphold values of integrity, objectivity, professional competence and due care, confidentiality and professional behaviour. However, competing pressures can put professional accountants in challenging and often times difficult situations. These conflicts revolve around ethics, commercial pressures and the burden of regulation.

Situations may occur where professional accountants in businesses are expected to help the organization achieve certain financial outcomes. In some of these cases, the required action may risk compromising compliance with accounting and financial reporting rules. Professional accountants in businesses encounter tension in these situations. As an example, accountants in organizations may face pressures to account for inventories at higher values or select alternative accounting methods which are more financially favorable to the company. However, these actions may be contrary to what are allowable in the accounting standards or to what the professional accountant may feel comfortable with.

The Role of Professional Accounting Bodies in Promoting Professional Accountants

Professional accounting bodies globally have the important mandate of representing, promoting and enhancing the global accountancy profession. At the national level, the professional accounting body is the voice for the nation’s professional accountants; this includes all professional accountants both in practice and in business. Because they play different roles in the society, the overall status of the accountancy profession can only be strengthened when both professional accountants in practice and in business are well-perceived by society.

Because professional accountants in business are often the only members of staff who are professionally trained and qualified in accounting in the organization, they are more likely to rely on their professional accounting body for assistance in carrying out their work. They will look to the professional accounting body to provide them with the support and resources they need in doing their daily jobs and to keep their skills up-to-date. For example, professional accountants in business may look to their subject matter experts in the accounting body for advice on how to handle ethical dilemmas. They will also be dependent on their accounting body to provide continuous professional development training initiatives to keep their knowledge and skills current.

Evolving Role in an Evolving Environment

Like other professions, professional accountants are increasingly challenged to demonstrate their relevance in the capital market and their ability to evolve and face new challenges. Public expectations are high. The value of professional accountants will be measured by the extent to which they are perceived to be accountable not only to their own organizations but more importantly to the public.

Professional accountants in business are a key pillar in organizations helping to create and sustain value and growth. Their ability to continue to fulfill these roles in the face of constant environmental changes is vital to their continued relevance. Professional accountants in business are also the front runners when it comes to upholding the quality of financial reporting and providing the broader public with reliable financial information.

Professional accountants in business are an important critical mass in the global accountancy profession. The same applies at the national level. Public education on the diverse roles of professional accountants in business needs to be stepped up so as to increase the visibility of these roles. Professional accounting bodies also need to pay attention to their members in business and provide them with the support they need in order to succeed in their roles. Their voices also need to be represented. Achieving success on all these fronts will drive continued recognition by society of the value of professional accountants in business. This shapes the continued success of the accountancy profession as a whole.

About the authors:

• Len Jui CPA MBA, is KPMG Huazhen’s Partner – Head of Public Policy and Regulatory Affairs, Quality and Risk Management. He was formerly Associate Chief Accountant of the US Securities and Exchange Commission. Jui is a member of the China Auditing Standards Board and Technical Adviser to China’s Member of the Board of the International Federation of Accountants.
• Jessie Wong CPA PhD, is KPMG Huazhen’s Director – Public Policy and Regulatory Affairs, Quality and Risk Management. She was formerly Senior Technical Manager of the International Auditing and Assurance Standards Board and was also Policy Adviser of CPA Australia. Wong is a member of the Chinese Institute of Certified Public Accountants International Standards Taskforce.

The public sector, including national, regional, and local governments and related governmental entities, plays a major role in society. In most economies, public expenditure forms a significant part of gross domestic product (GDP) and public sector entities are substantial employers and major capital market participants. The public sector determines, usually through a political process, the outcomes it wants to achieve and how it wants to achieve them. These include enacting legislation or regulations; delivering goods and services; redistributing income through mechanisms, such as taxation or social security payments; and the ownership of assets or entities, such as state-owned enterprises. Governments also play a role in promoting fairness, peace and order, and sound international relations.

Effective governance in the public sector leads to better decision making and the efficient use of resources, and strengthens accountability for the stewardship of those resources. Effective governance is characterized by robust scrutiny, which provides important pressures for improving public sector performance and tackling corruption. Effective governance can improve management, leading to more effective implementation of the chosen interventions, better service delivery, and, ultimately, better outcomes. People’s lives are thereby improved.

The International Federation of Accountants (IFAC) and the Chartered Institute of Public Finance and Accountancy (CIPFA) recently issued a Consultation Draft for an International Framework on good governance in the public sector. Good Governance in the Public Sector follows an initial review of relevant governance literature and includes input from public sector governance experts.1

This proposed Framework will be important to public sector entities, and their stakeholders, who want to improve their governance at all levels across the globe. It offers a set of core principles for good governance in public sector entities, supplemented by practical implementation guidance.

The proposed Framework is not intended to replace national and sectoral public sector governance codes. Instead, it was designed as a reference for those who develop and set national governance codes for the public sector when updating and reviewing their own codes. Where codes and guidance do not exist, the Framework provides a shared understanding of what constitutes good governance in the public sector and a powerful stimulus for positive action.

Definition and Key Principles

In the Framework, governance is defined as the arrangements, including political, economic, social, environmental, administrative, legal, and other arrangements, put in place to ensure that the intended outcomes for stakeholders are defined and achieved.

The Framework says the function of good governance in the public sector is to ensure that entities act in the public interest at all times, which requires:

A.     Strong commitment to integrity, ethical values, and the rule of law; and

B.     Openness and comprehensive stakeholder engagement.

 In addition to the requirements for acting in the public interest, achieving good governance in the public sector also requires:

C.     Defining outcomes in terms of sustainable economic, social, and environmental benefits;

D.     Determining the interventions necessary to optimize the achievement of intended outcomes;

E.     Developing the capacity of the entity, including the capability of its leadership and the individuals within it;

F.     Managing risks and performance through robust internal control and strong public financial management; and

G.    Implementing good practices in transparency and reporting to deliver effective accountability.

These core principles for good governance in the public sector are high level and bring together a number of concepts.

Introduction

The International Auditing and Assurance Standards Board (IAASB) has released proposals that could fundamentally transform the auditor's report, greatly enhancing its communicative value. The Exposure Draft (ED) proposes a new standard, International Standard on Auditing (ISA) 701, Communicating Key Audit Matters in the Independent Auditor’s Report, and a number of revisions to existing standards, including ISA 700, Forming an Opinion and Reporting on Financial Statements (see IAASB press release). While the proposals stand to significantly change the shape of auditor reporting for listed entities, the impact on unlisted entities is likely to be much smaller. Nevertheless, there are proposed requirements that apply to all audits. These are intended to help demonstrate the value of the audit and, furthermore, may improve service and promote engagement efficiency.

This article summarizes this impact and suggests how small- and medium-sized practices (SMPs) and small- and medium-sized entities (SMEs) can get involved to help ensure the best possible outcome.

Proposals

The proposed new and revised standards deal mainly with reporting considerations, which typically involve decisions by the auditor toward the end of the audit process. There are, however, aspects that may have implications for what the auditor does at or near the beginning of the audit, such as agreeing the terms of and planning the engagement, as well as communicating with those charged with governance. The most significant implications for the audits of unlisted entities are described below.

Content of the Auditor’s Report

The centerpiece of the proposals is proposed ISA 701. This completely new standard establishes requirements and guidance for the auditor’s determination and communication of key audit matters in the auditor’s report. Key audit matters, which are selected from matters communicated with those charged with governance, are required to be communicated in the auditor’s report for listed entities. Auditors of financial statements of unlisted entities may also be required, or may decide, to communicate key audit matters in the auditor’s report.

For example, law, regulation, or national auditing standards may require auditors of unlisted entities in a particular jurisdiction to communicate key audit matters. Moreover, the auditors of other unlisted entities may wish to use the new mechanism of key audit matters on a voluntary basis. Where key audit matters are communicated for audits of financial statements of unlisted entities (either voluntarily or when required by law or regulation) then such matters should be determined and communicated in the same manner as for listed entities (see paragraph 4 of proposed ISA 701 and paragraphs 30 and A30–A31 of proposed ISA 700 [Revised]).

ISA 700 has been revised to establish new required reporting elements, including a requirement for the auditor to include an explicit statement of auditor independence and disclose the source(s) of relevant ethics requirements, for all audits including those of unlisted entities. Similarly, ISA 570, Going Concern, has been amended to establish auditor reporting requirements applicable to all audits. The IAASB believes it is in the public interest for this to have universal application.

Agreeing the Terms of the Engagement

In light of the possibility of auditors of unlisted entities communicating key audit matters in the auditor’s report, or being requested by management or those charged with governance to do so, the IAASB has proposed limited amendments to other ISAs, including ISA 210, Agreeing the Terms of Audit Engagements. Specifically, if the auditor is not required to communicate key audit matters but intends to do so, a new requirement has been established for the auditor to include a statement in the audit engagement letter regarding such intent. This will provide an additional opportunity for the auditor to communicate with management and those charged with governance to ensure there’s a clear understanding as to the nature of the key audit matters to be disclosed.

Communicating with Those Charged with Governance

In light of proposed ISA 701, amendments are proposed to the required auditor communications with those charged with governance for all audits. The most significant proposed change to ISA 260 relates to the existing requirement for the auditor to communicate an overview of the planned scope and timing of the audit with those charged with governance. Proposed ISA 260 (Revised), Communication with Those Charged with Governance, expands this requirement to include communicating about the significant risks identified by the auditor (see paragraph 15 of proposed ISA 260 [Revised]).

Communication with those charged with governance about significant risks is likely already occurring in many audits, including those of SMEs, as ISAs demand a risk-based approach to the audit. But the IAASB believes audit quality could benefit from explicitly requiring such communication in every audit. The proposed requirement would provide those charged with governance with insight into those areas for which the auditor determined special audit consideration was necessary and, in so doing, help those charged with governance to fulfill their responsibility to oversee the financial reporting process. This will also provide the auditor with an opportunity to garner additional insights into significant risks from those charged with governance and, thereby, help ensure the audit program is appropriately focused.

The IAASB believes it is in the public interest to establish this requirement for audits of financial statements of all entities, not only for listed entities. Communicating with those charged with governance about significant risks is not expected to result in a significant burden on auditors who are not required to communicate key audit matters in the auditor’s report (e.g., auditors of unlisted entities), as proposed ISA 260 (Revised) remains flexible for such communication to be made orally. In addition, the IAASB proposes requiring the auditor to communicate, as part of communicating the significant findings from the audit, circumstances that require significant modification of the auditor’s planned approach to the audit, to align with the factors the auditor considers in determining key audit matters (see paragraph 16(c) of proposed ISA 260 [Revised]). This will provide further opportunity for dialogue with those charged with governance to help ensure all responsible parties have a full understanding of areas of significant auditor attention.

Feedback

The IAASB believes that the proposed ISAs can be implemented in a manner proportionate to the size and complexity of an entity and welcomes the views of both preparers and auditors of financial statements of unlisted entities, including SMEs, in this regard. The IAASB also invites respondents to comment on areas where additional guidance may be helpful to illustrate how the proposed ISAs can be implemented in a proportionate manner. The IFAC SMP Committee has been providing regular and robust input to the IAASB throughout the ED's development, starting with a response letter to the Invitation to Comment. Please tell us and the IAASB (click on Submit Comment) what you think about the ED and consider field testing ISA 701 on unlisted entities.

The International Auditing and Assurance Standards Board (IAASB), the audit profession's peak global standard setter, has just released a blueprint for the most significant changes to the audit profession's communication with investors in decades.

The proposals include a new standard, ISA 701 Communicating Key Audit Matters in the Independent Auditor's Report and a number of revisions to existing ISAs, including ISA 700, Forming an Opinion and Reporting on Financial Statements.

The exposure draft has been years in the making and is the result of the IAASB's outreach with investors and other key stakeholders. But what does this really mean for investors and what can they expect from the proposed changes?

Far from being an end point, a new set of auditor reporting standards will mark the beginning of the most challenging part of this journey - implementation. While offering much promise, the IAASB's proposals are a stretch for a profession which has already undergone extensive regulation and re-regulation in recent times.

The crux of the draft standards is that auditors would no longer solely attest to a company's financial report, but they would take on the role of providing their own narrative on key matters in the audit. In adopting this change, the IAASB essentially provides a blank canvas within the audit report. The value and effectiveness of these changes for investors will depend on how that canvas is painted - a fundamental shift and challenging undertaking for auditors who are handed the palette and brush.

Enhanced auditor reporting could go toward addressing expectation gaps related to the audit role from both sides: providing more accessible insights into the work of auditors, and an enhancement in the role itself. At the same time, in removing the simplicity of the current binary form audit report - which provides a 'yes' or 'no' on the financial statements - there is a risk that misaligned expectations could be exacerbated. Once again, the proof will be in the pudding, or on how the additional narrative space within the audit report is used.

A recent enquiry of the UK Competition Commission into the UK statutory audit market highlighted the importance of shareholder engagement in the appointment of auditors. Enhancing auditor reporting may serve to enable a greater degree of engagement, and could see firms competing to provide in their report more relevant, understandable and clearer information for shareholders.

The auditor's core role, their opinion on financial statements, comes attached to significant legal and professional accountabilities. There is a precision in the language used within current standardised auditor reports that could be impacted by introducing a more freeform model. Auditors will face the challenge of balancing their accountabilities whilst also presenting reports that are not only informative, but which bridge from often technical language to communicate in a way that is accessible to a diverse range of stakeholders.

The audit profession in Australia has already begun field testing the draft standards. To be at this point is a mark of the auditing profession's strength. As firms in Australia complete their 2013 June year-end audits, there is already a swelling of activity that anticipates how the exposure drafts would apply, and what potential issues and practical complications could arise.

This is a clear effort by IAASB to enhance how investors are informed and a genuine step forward. The ultimate measure of this shift will be the value investors place on these enhancements. With the consultation period set to close on 22 November 2013, I urge the profession to use this time to focus on how to overcome the challenges and how to enhance auditor reporting toward the needs and perspective of those using the reports.

Originally published in The Accountant