Extended audit reports: where is the new information?
23 September: “The current system is not producing incremental information,” says Miguel Minutti-Meza, Associate Professor of Accounting at the University of Miami. He talks to Insights about the extended audit report and the work he is doing to determine what has been achieved.
There is clearly an expectations gap between the information desired by stakeholders and the information provided in a standard audit opinion. However, what investors and the profession hoped would be achieved by the recent introduction of extended (or expanded) audit reports has fallen somewhat short, says Minutti-Meza.
He says: “Overall, I believe expanded reports offer a promise that is yet to be fulfilled. Regulators, auditors and companies have spent considerable time and resources in making expanded reports a reality, but it is yet unclear whether these efforts have increased (or will increase) the usefulness of audit opinions.”
In his work at the University of Miami, he questions the incentives for auditors in delivering new information. He suggests there has been some disappointment in the new reporting regime for investors, querying the role in all this for regulators, and describes the harsh reality around outcomes compared with best intentions.
He explains that the new generation of expanded audit reports, with additional disclosures, heralded a notable change in auditors’ responsibility to provide information to the public. In ICAEW’s flagship PD Leak lecture, to be delivered on 14 October, he will tackle robust questions around whether extended audit reports have fulfilled the expectations of regulators and other stakeholders.
Commenting on the different approaches taken by regulators around the world, Minutti-Meza points out that the UK’s FRC was the first to issue rules in 2013. Then came the IAASB and most recently the US regulator. “We have moved from a world of standardised reporting to a world where the auditor has to produce disclosures. As of 2019, nearly 70 jurisdictions have complied with this requirement,” he says.
“It is also debatable what the incentives are – besides compliance with regulation – for auditors to produce new information,” he continues. “In most cases, the extended audit report has not caused a market reaction in the way it was hoped. It has not changed audit quality, and it has not changed audit fees. The extended audit reports simply do not contain as much information as some stakeholders expected.”
He points out that auditors’ disclosures do not necessarily achieve real communication of the issues a company may be facing. He says that we have seen this time and again in the expanded reports of companies that have recently collapsed. “In fact, users are very confused by what an auditor does,” he says and goes on to question whether auditors can ever disclose their views about issues within a company’s operations, financial reporting, culture, economic environment, etc.
Minutti-Meza questions whether the purpose of the extended audit report is simply to reveal that there are “known unknowns”. Is that what investors are demanding to know? Probably not. “We are at a crossroads,” he says. “If we keep reporting in this way, the extended audit report will become another checklist.”
To attend, the PD Leake Lecture ‘The art of conversation: the extended audit report’ please sign up here.