Date: July 30, 2015
SIAS welcomes the adoption of enhanced auditor reporting standards as it would enhance transparency. For the first time, investors will have insights on the audit risks that are identified by auditors as well as the audit procedures they took to address those risks. Despite a longer report, the additional information provided in the report will focus the dialogue between investors and management/audit committee/auditor on key issues i.e. things that matter.
The introduction of the Key Audit Matters section will highlight the issues that auditors will have to exercise significant judgement. For example, in the case of Noble or Olam, they will probably spend a lot of time looking at the valuation of the commodities or the biological assets. Also in the Key Audit Matters, they have to tell investors how they managed to discharge that judgement by perhaps looking at management’s valuation methods, estimates and assumptions and testing them against market prices or professional valuation reports. These changes would help because shareholders will on the onset know about the existence of such a judgemental areas and how judgment had to be applied in coming up with a fair value. However, there might be a volatility in the market prices and, therefore, any fall in prices could not be predicted by the Key Audit Matter disclosure.
The introduction of the Key Audit Matters would likely spur companies to be more careful in their valuation and to apply a consistent methodology of doing their valuation. But it may not change the way they do their valuation. For example, right now if the accounting standards only permit valuation at fair value for certain types of assets, they cannot start changing their valuation to reflect it at cost. They have to work within the constraints of methodologies permitted under the accounting standards and as such they cannot alter the way they do their valuations. However, where there are two permissible valuation methods, the company is less likely to switch between two methods to show better valuations, as it is likely to be a Key Audit Matter that will be discussed if the financial impact was significant.
David Gerald
Founder, President & CEO
Securities Investors Association (Singapore)
