- Our profession is experiencing rapid change, from evolving technology to greater stakeholder scrutiny
- The demand for credible, high-quality information has never been higher
- The future of audit and reporting as it applies to people, product and processes will remain in the spotlight
Last year was certainly a big year in the reporting and assurance spaces. The final wave of the big new accounting standards came through and auditing was in the media and political spotlight in Australia and overseas.
A number of initiatives were introduced in 2019 in both reporting and assurance and these will continue to gain traction. As a result, we can make some fairly confident predictions about what the key themes will be this year – many of which are interrelated. There will also be some attributes that overlay all of these – such as technology. Here are the top six topics we expect to dominate 2020 and beyond.
The future of audit
Change is afoot around the globe, and the future of audit discussion that has been going for some time is coming to a peak. The CA ANZ Comprehensive Plan on Audit and Risk, which we submitted to the Australian parliamentary inquiry, provides a roadmap for how to improve the confidence in, relevance and quality of, audits.
In New Zealand, we held two CA ANZ Audit Summits in 2019 and found there was a continuing desire for proactive change to come from the profession itself and its stakeholders rather than external forces. We will continue to facilitate and drive this conversation. At the Audit Summit in December, many stakeholders expressed the desire to develop a comprehensive plan for the New Zealand context similar to the Australian one.
In Australia, the Parliamentary Joint Committee on Corporations and Financial Services is due to report on the inquiry into the regulation of auditing by 1 March. CA ANZ presented to the Committee in November 2019 and we will continue to advocate for maintaining public confidence, addressing the risks facing businesses and consumers, and improving audit quality as set out in the CA ANZ Comprehensive Plan. The submissions to this inquiry have shown a strong level of support for many of CA ANZ's recommendations.
In the UK, Sir Donald Brydon has published his report on the independent government review into the quality and effectiveness of audit. This recommends some of the most fundamental shifts in auditing in recent decades, including a much wider scope of activity to encompass environmental, social and governance aspects in the public interest. This report is expected to be incredibly influential in the UK audit reform process and further afield. Sir Donald will visit CA ANZ Sydney and Auckland during March 2020 and events are planned for Chartered Accountants and stakeholders to hear what his recommendations may mean for Australia and New Zealand.
The AASB will continue its work on the Australian Financial Reporting Framework and special purpose financial statements. It intends to finalise its proposals for for-profit entities by 30 June 2020, including issuing the Tier 2 Simplified Disclosure Standard, before focusing on not-for-profit (NFP) entities.
As reported late last year, the latest proposed changes have moved towards what Chartered Accountants are looking for on several fronts, particularly in terms of simplifying disclosure requirements. However, we are still pushing for a transition period of two years. More than 500 Chartered Accountants and industry professionals shared their views on framework reform and its costs and impacts in our Future of Special Purpose Reporting Survey late last year.
Next the AASB will consult on NFP reforms, with a view to having a new reporting framework in place by 2022. Early indications are that this is likely to include three reporting tiers (with simplified recognition and measurement in the third tier) and part of the mix will be increasing reporting thresholds. In the meantime, NFP entities already preparing Tier 2 general purpose financial reports will be able to adopt the AASB’s new Simplified Disclosure Standard.
In New Zealand, the outcome of the targeted review of the accounting standards framework will be revealed, and an Incorporated Societies Bill bringing in new reporting and audit requirements will be introduced. CA ANZ will continue to facilitate input from Chartered Accountants to inform our submissions on all of these consultations.
At the international level, two ongoing projects are highly pertinent – a comprehensive review of the IFRS for SMEs standard and another investigating whether subsidiaries that are SMEs can apply the recognition and measurement requirements of IFRS consistent with their parent while benefitting from the lower disclosure requirements in IFRS for SMEs.
Beyond the numbers
While traditional financial reporting is, and will remain, a cornerstone of corporate reporting, in isolation it has its limitations. The challenges involved in providing information about a company’s intangible resources and relationships that drive business success and value creation have come into increasingly stark relief in recent years. One way to communicate such value is through Integrated Reporting (IR), and this issue will gain momentum through 2020. CA ANZ will continue to promote the uptake of IR, including our partnership in the new Center for Integrated Reporting at Deakin University in Victoria.
Valuing and assessing the possible impairment of intangible assets and goodwill has been central to recent scrutiny in financial reporting and auditing arising from regulatory inspections and corporate collapses. The IASB is investigating possible improvements to goodwill and impairment and intends to issue a discussion paper in February. The IASB is also working on a major overhaul of its Management Commentary Practice Statement, which is basically a manual for writing the front half of an annual report. There will be more focus on intangibles, and the pendulum is shifting towards long-term value creation. An ED is expected in the latter half of 2020.
The question then becomes how can investors trust this narrative-based future-oriented information? Well, a complete draft of the IAASB's guidance on applying ISAE 3000 Assurance Engagements Other than Audits or Reviews of Historical Financial Information to Extended External Reporting (EER) is imminent. We will be asking members for feedback during 2020.
Non-financial risks, including climate
Climate and other emerging risks – such as those related to cyber security, organisational conduct and culture – have dominated public discourse. Investors are demanding to know how entities deal with such risks and are taking this issue into account in their investment decisions. For instance, BlackRock, the world's largest asset manager, recently vowed to make climate change central to its investment decisions. Corporate reporting and auditing have critical roles to play in shedding light on these issues. These types of evolving risks, and how they are addressed in an integrated way, is at the core of CA ANZ's Comprehensive Plan on Audit and Risk that includes the roles of accountants, auditors, managers, directors and regulators.
The IASB and the AASB/AUASB have made it clear that climate-related and other emerging risks are covered by existing requirements in the accounting standards, and have provided guidance on applying materiality to them. This means that such risks are not just a matter for the other parts of the annual report – "investor expectations may make such risks 'material' and warrant disclosures when preparing financial statements, regardless of their numerical impact".
As the effects of these risks become more visible, the disclosures will gain prominence in financial statements and be subject to audit. Auditors are likely to need to consider climate-related, and other emerging risks, in their assessments in 2020 and beyond for a range of entities. CA ANZ will continue to promote a focus on clarity and workable standards around the disclosure of emerging risks, as well as an integrated approach to the lines of defence. We also have sessions at Accounting Conference on this topic.
Auditing standards and small and medium entities
The recent IAASB consultation on audits of less complex entities garnered an unprecedented level of interest from around the world. There was a diversity of views on the three options (revising the ISAs; developing a separate standard; and guidance). This may be a reflection that these options are not mutually exclusive, and the way forward is likely a combination of approaches.
The IAASB recognises that a global solution is needed and is committed to promoting this. A feedback statement has been released, and recommendations for future actions will be discussed by the IAASB at its March meeting. We are monitoring this project with interest and have sessions on this at Audit Conference. In the meantime, we will continue to advocate for scalability in future IAASB exposure drafts where necessary. The next one anticipated is ED ISA 600 Group Audits, so we will be seeking member input on this during the year.
Closer to home, the NZAuASB has been exploring introducing something similar to the UK’s Independent Examinations regime to meet the assurance needs of small NFP funders.
Digitalisation and better communication
Even though traditional financial statements are still used extensively, the way in which that information is consumed has evolved, and there is an increasingly diverse audience. More countries are adopting digital financial reporting and this will become more prominent in Australia and possibly New Zealand over 2020.
The latest output of the IASB's Better Communication in Financial Reporting project is proposing significant changes to income statements to improve their value to investors.
The proposals, released in December 2019 and open for comment until June 2020, restructure the statement, defining important totals such as operating profit and providing better guidance on what items can be grouped and what items can be considered unusual.
Management would also be required to reconcile any non-GAAP measures to IFRS if they wish to use alternative performance measures, explaining how they are calculated and why management thinks its measures are helpful. We plan to make a submission on this, so please do let us know what you think.
If you have any thoughts on any of the topics mentioned in this piece, then we want to hear from you!Email us