Three accounting groups—two in the United States and one abroad—plan to study what the market believes an auditor’s report should say, as a preliminary step in potentially revising how the report should be written.
The American Institute of Certified Public Accountants, the American Accounting Association, and the International Auditing and Assurance Standards Board want to research the “expectation gap” that they already sense exists between what an auditor’s report is supposed to communicate and what readers take away from it, says Charles Landes, vice president for professional standards and services at the AICPA.
Landes
“If someone reads an auditor’s report, do they really understand not only what an audit encompasses, but do they also understand the limitations of an audit?” Landes explains. “There’s always been anecdotal evidence of this expectation gap. If there is an expectation gap, how could we rewrite the auditor’s report to be clear so users better understand the purpose of the audit as well as the limitations?”
The public often points a finger at the auditor when a company goes under or an investment goes bad, asking why the auditor’s report didn’t foretell the trouble, Landes says. That ire has been especially intense since failures on the scale of Enron and WorldCom. “An audit gives a high level of assurance but it can’t guarantee anything … There are materiality concepts that the auditor has to consider,” he says.
The IAASB recently revised its standards to drive some minor language changes in its prescribed auditor’s report, and they become effective for reports beginning in 2007, IAASB Deputy Director Alta Prinsloo says. The AICPA’s Auditing Standards Board wants to initiate similar changes, Landes says, but concluded the research might be an effective preliminary step to define more clearly what users believe an auditor’s report says compared with what auditors intend to convey.
“From the IAASB’s perspective, it will be useful to see whether the users’ perceptions vary depending on whether the wording of the auditor’s report follows that of the U.S. Auditing Standards Board or that of the IAASB,” Prinsloo says.
Landes says the three groups are ultimately committed to harmonizing the auditor’s report across international boundaries, but the joint research project doesn’t guarantee it. “Although there is no commitment to make any changes to the IAASB’s wording of the auditor’s report at this stage, the results of the research may be considered during future revisions of the auditing standard affecting the auditor’s report,” Prinsloo says.
Beasley
Mark Beasley, president of the AAA Auditing Section and a professor at North Carolina State University, said the project is meant to be a global effort. “The plan is for the ASB to select one or more proposals to examine U.S. perceptions, and the IAASB to select one or more proposals to examine perceptions internationally,” he said in a statement. “We envision that, once the selected projects are completed, the ASB and IAASB will fund additional research to identify and explore ways in which the auditor’s report might be revised to communicate more clearly and to address identified user misperceptions.”
The three groups have issued a joint request for research proposals, from which it hopes to select the projects it will sponsor this fall, Landes says. The process may take up to two years to affect audit report rules.
Survey: Companies Still Bet On Risky, Manual Processes
Despite the proliferation of technology and the significance attached to accuracy in financial reporting, up to 92 percent of companies—public and private alike—take revenue data offline and into spreadsheets during their financial reporting process, according to a recent study.
The survey of 685 companies, 120 of them with revenues of at least $1 billion, said 68 percent of all companies use financial or enterprise resource planning systems that do not automate all their revenue recognition and reporting activities.
“Revenue recognition processes are dependent upon information from multiple sources and typically cannot be executed in existing enterprise systems,” Kathleen Wilhide, a director for IDC, said in a statement. IDC helped conduct the survey.
“I find it interesting that there is such heavy reliance on manual or semi-manual processes, even for large companies with high IT budgets,” says Charles Mulford, director of the Georgia Tech Financial Analysis Lab, who reviewed the survey findings. “Manual processes highlight the existence of internal control risks and the possibility that firms are not complying with Generally Accepted Accounting Principles, resulting in erroneous revenue numbers.”
Mulford
Mulford says the risk doesn’t necessarily mean companies are not in compliance or lack an adequate control environment. “Other controls are likely in place to ensure that revenue amounts are still accurate and recognized properly,” he says. “In fact, I would expect that such compensating controls are in place given auditors’ responsibility to evaluate the overall integrity of clients’ internal control processes.”
The survey, described in a free report titled “Enterprise Systems and Revenue Recognition: The Missing Link,” was commissioned by software company Softrax Corp. and conducted by RevenueRecognition.com and IDC, all of which have a stake in the increasing automation of financial data.
“Given the parties involved, I think that the ulterior motives for the survey are rather clear,” Mulford cautions. “That said, however, there are interesting points here.”
AICPA Follows PCAOB’s Lead In Audit Standards Terminology
The AICPA is revising a chapter of its auditing standards to make the language consistent with Auditing Standard No. 2 as enforced by the Public Company Accounting Oversight Board.
The AICPA is adopting much of the terminology the PCAOB introduced with its May 2006 guidance in its revisions of the internal control audit chapter of its Statement on Standards for Attestation Engagements No. 10. That includes modified approaches to the terms “reportable condition,” “material weakness,” “control deficiency,” “significant deficiency,” and other concepts.
Landes at the AICPA says its Auditing Standards Board was already on course to follow PCAOB’s lead when the May guidance was issued, so now the Board is taking further steps to incorporate the language from the guidance into the AICPA’s own standards for private entities.
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