Oregon Ducks’ Football Uniforms: Applying the Hype to Auditor’s Report
What does the auditor’s report and the Oregon Ducks’ football team uniforms have in common? Well, nothing, except that when an innovative change causes a splash one year, what happens the following year is what forms expectations.
Lessons from Ducks
The Ducks introduced new uniforms, unlike anything any team had done before, some years ago to improve recruiting and build excitement around its program. Now after years of regular change, fans eagerly await what exciting uniform the Ducks will don at every game. See for yourself how the Ducks’ uniforms have changed over the years. Wings, silver, neon, you name it. One thing you can count on is that at each game the uniform will create a buzz.
Will Auditor’s Report Fly in Similar Pattern?
Time will tell if the auditor’s report can build a similar expectation with investors after decades of reporting uninformative, stale information. But early signs are encouraging. Now there is a second year data point to consider as it relates to auditor’s reports issued based on the UK Financial Reporting Council (UK FRC) standard, issued in 2013. It’s not metallic neon green, but it’s a start.
The inaugural UK FRC’s auditor’s report, which we first wrote about last year using the Rolls Royce report as an example, was a big deal. The information provided in that report was unlike anything we had seen before. The thinking at the time was that of course it was significant — this, afterall, was the first year of change. The real question, though, was what would happen in subsequent years? Would it still be a big deal, or would users of the report begin to see routine boilerplate language develop?
Investors Want Well-Designed Uniforms, Too
The UK FRC has reported on the results of its second survey, Extended Auditor’s Reports: A Further Review of Experience. The report details developments in auditor reporting covering 80% of the premium-listed FTSE 350 companies in the UK.
The UK FRC’s key findings from its summary of the report include:
- Investors welcome the information included in extended auditor’s reports, and particularly for smaller companies where there tends to be less independent information available.
- In general, auditors have continued to move away from generic language and descriptions of risk, making their reports more relevant and insightful.
- The reports which have earned the greatest praise from investors tend to be well structured, signposting key information and often make innovative use of graphics, diagrams and colour.
Many investors feel that more could be done to enhance auditor’s reports, including:
- Providing more complete information about the sensitivity ranges used in audit testing.
- Giving greater insight into the auditor’s assessment of the quality of an entity’s internal controls informing their significant risk assessment.
- Being more explicit about the auditor’s view on the appropriateness of management estimates.
Overall, investors prefer greater transparency about assumptions made by management and the benchmarks used by auditors in making key judgements. The UK FRC recognises that this has to be balanced against the potentially competing demands for auditor’s reports to demonstrate clarity and conciseness, as well as preserving the importance of reading an overall true and fair opinion.
Areas where auditor’s reports could be further enhanced include:
- More frequent inclusion of commentary about what the auditor found as a result of the work done on risks of misstatement.
- Explanations of changes to the audit approach, materiality or risk assessment over time.
- More auditors to include information about “performance materiality” — how it is derived and how it impacts on the audit.
Investors: More Information Now Available
CFA Institute agrees with the UK FRC’s observations, particularly where further enhancements could be made. Overall, we believe that the new auditor’s report continues to provide investors with more information about the audit than it has seen in many years.
We believe that the UK FRC experience provides a good early example of a “uniform change” as the auditor’s reports are changed under the International Auditing and Assurance Standards Board (IAASB) and ultimately the US Public Company Accounting Oversight Board (PCAOB).
One thing is for certain, just as fans expect to see changes in the Ducks’ football uniforms, investors expect the same of the auditor’s report.
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Image Credit: iStockphoto.com: SidorovStock