Qais Al Nisf, Managing Partner, BDO, on post-financial crisis auditing

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Qais Al Nisf, Managing Partner, BDO, on post-financial crisis auditing

 

The 2008 financial crisis has caused regulators and investors to call into question the purpose and value of the traditional statutory audit. Partially as a consequence of this, major investigations are under way around the world into the regulation and structure of the audit profession. Commentators have tended to look at the issues surrounding financial reporting and those related to auditing as being separate. However, we believe they are inextricably linked and need to be considered in tandem to avoid the unintended consequences of changes to one regime having an impact on the other. For any accounting framework to be valued and relied upon by users, it must be capable of being subject to appropriate assurance; by the same token that assurance must be robust and unequivocal.

All financial reporting frameworks are based on similar principles but the emphasis that each gives to differing principles has a different weighting and we would contend that in recent years there has been a shift in tone away from the concepts of prudence, comparability and understandability in a desire to create a framework that is theoretically sound in terms of providing measures of value. In the past, prudence was very much a guiding principle. This is no longer the case and it is now one of many qualitative characteristics rather than being a watchword, particularly for the auditor.

In the context of the global financial crisis, one does wonder whether an emphasis on prudence would have caused preparers and auditors to question more robustly the asset values that were carried in accounts, with uplifts often recognised in the income statement, where those uplifts were not easily capable of being crystallised and subsequently never were. When users talk of comparability, they are most often considering the income statement. We now have unrealised profits passing through the income statement and other movements in value, which are unrelated to underlying financial performance. This practice, we believe, removes the cornerstone of comparability. It is a truism to say that the world is becoming more global in terms of business operations and communications. In this context, it is important that investors (and other users of financial information) can compare like companies in like sectors around the world on the same standards of financial reporting. Indeed, there has been enormous progress over recent years for International Financial Reporting Standards (IFRS) to become the global accounting standard and we hope that this is a trend that will continue, most notably should the US adopt IFRS.

Unfortunately, IFRS is an accounting framework that fails to be good because it aims to be perfect. We believe that, in some areas, IFRS has become too complex and is actually trying to apply a theoretical framework to business economics which is not replicated in the real world. This extension of accounting principles beyond reality seems to be causing consternation among business people and is leading them to distrust the accounting results that emerge. In this context, we believe that auditability is a legitimate element in determining accounting treatments. If no assurance can be given, can users rely on financial information? There is an inevitable range of outcomes that the application of broad theory to asset valuation can give. The wide range of possible but legitimate outcomes gives auditors a very real difficulty. There have been a number of questions raised over the part played by IFRS and fair value accounting in the current crisis in the financial market. However, it is not good enough to simply blame an accounting framework.

The provision of assurance over financial (and non-financial) information requires a radical re-think. Our vision is of one framework for global accounting standards. Maintaining standards means producing annual reports that are clear and uncluttered. They should have a narrative that tells users what they need and want to know. They should be underpinned by financial reports that have been derived in a way that experienced businesspeople can intuitively understand, and which include disclosures only to the extent that they aid the reader’s understanding, rather than obscure it.

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