Investor Expectations Are High That the New Auditor’s Report Won’t Be Al Capone’s Vault
When a vault owned by prohibition era gangster Al Capone (whose prison cell is pictured here) was discovered under one of his favorite hideouts, the Lexington Hotel, nearly 40 years after his death, expectations were high that vast riches or even bodies would be revealed when it was opened. The vault of the notorious bootlegger, FBI fugitive, and organizer of the St. Valentine’s Day massacre was the focus of a live television event, The Mystery of Al Capone’s Vault, hosted by Geraldo Rivera in 1986.
Despite the hype, including news that a medical examiner and Internal Revenue Service agent would be on hand to handle any bodies or money discovered, only debris and empty bottles were found when the vault was opened.
High Expectations for More Informative Audits
Similar to Capone’s vault, expectations are high that beginning in 2017, independent auditor’s reports issued under standards published by the International Auditing and Assurance Standards Board (IAASB) will finally reveal more information about the audit. What will be revealed in these reports for investors and other stakeholders to see? Will investors gain real insight into the auditor’s work? Or will they be left with only the boilerplate “debris and empty bottles”?
Watch Matt Waldron explain how new audit standards will live up to the hype — better transparency for investors and key stakeholders that ensure market integrity — and how CFA Institute played a role in shaping them.
The most significant change is that there will be a new section included in the audit report to communicate key audit matters, or KAMs (those audit areas or matters that are the most significant to the audit work — essentially, those matters that kept the auditor awake at night). In determining whether something is a KAM, the auditor will consider and communicate the following:
- Risk Areas: Areas of higher assessed risk of material misstatement, or significant risks.
- Judgments: Significant auditor judgments relating to areas in the financial statements that involved significant management judgment, including accounting estimates that have been identified as having a high estimation of uncertainty.
- Events: The effect on the audit of significant events or transactions that occurred during the period.
The new auditor’s report will greatly improve communications between investors and the auditor. This renewed focus on KAMs should improve financial statement disclosures and result in enhanced audit quality, both of which will make financial statements more reliable for investors.
Unlike Rivera’s and the public’s disappointment with Capone’s vault, investors can expect the reality to live up to the hype. Better transparency for investors and key stakeholders that ensure market integrity is priceless.
How We’ve Helped Shape the New Audit Standards
CFA Institute provided an investor perspective to the IAASB through our comment letter to them about the Auditor’s Reporting Model and a blog post about the benefits of an improved auditor’s report. Additionally, CFA Institute is represented on the IAASB’s Consultative Advisory Group (CAG) by Matt Waldron, chair of the CAG, and Mohini Singh, CAG representative, both of whom are directors in the Financial Reporting Policy Group at CFA Institute. More information on the IAASB Auditor’s reporting model can be found here.
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Image Credit: ©iStockphoto.com/Gary Whitton