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ICAS suggests that positive assurance on management commentary will restore investor confidence

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06 May 2013

The Institute of Chartered Accountants of Scotland (ICAS) has published a discussion paper recommending that the auditor should provide an explicit opinion that the management commentary in the annual report is balanced and reasonable and free from spin.

As consequence of the financial crisis, more questions are being asked about the value of corporate reporting and the related assurance. Often these questions concern perceptions that the story presented by management in the narrative commentary within the annual report is not free from spin and does not provide users with an insight into the way in which the organisation is being directed.

The ICAS therefore came up with the following recommendations (reproduced from the ICAS press release):

The external assurance provided by auditors on the management commentary must be improved to restore public and investor confidence.

The management commentary includes vital information summarising the directors’ view of the company’s business model and its future prospects.

With the ever increasing complexity of business and in financial reporting, investors increasingly pay more attention to the information disclosed in the management commentary section of the annual report.

Management commentaries of annual reports should be evaluated separately by auditors to determine whether the story presented is “balanced and reasonable”.

The expression of a positive opinion will require greater professional judgement and cause the auditors to “move beyond their comfort zone”.

ICAS suggests that consideration be given to a new three-tier assurance framework offering ‘high’, ‘medium’ and ‘low’ assurance.

The ICAS is well aware that such required positive assurance will cause additional efforts and costs and will also be greeted reluctantly due to the amount of professional judgment required. However, the report quotes successful implementation of required assurance in individual jurisdictions as proof that difficulties can be overcome. In Germany for example auditors are required to provide reasonable assurance over the ‘combined management report’.

The ICAS is also aware that it is not arguing in a vacuum and steps have been undertaken and are being undertaking to make management commentary more relevant.

On the reporting side, the IASB issued its IFRS Practice Statement Management Commentary in 2010 and the International Integrated Reporting Council (IIRC) released a consultation draft of its proposed International Integrated Reporting Framework in April 2013 including considerations of the consequences of disclosure or non-disclosure of certain pieces information that are often included in management commentary in April 2013.

On the auditing side, the IAASB issued an Exposure Draft proposing amendments to ISA 720 The Auditor’s Responsibilities Relating to Other Information in Documents Containing or Accompanying Audited Financial Statements and the Auditor’s Report Thereon. The proposed revision of the European Accounting Directives also contain a proposed amendment requesting that auditors shall be required to report on whether the management report is consistent with with the financial statements for the same year (in principle reflecting the current German requirements).

The ICAS is also pleased with more recent developments in the UK such as the Financial Reporting Council (FRC) requiring auditors to report by exception where the annual report of a listed entity is not fair, balanced and understandable. It does feel though that it is time to move forward toward positive assurance over the narrative section of the annual report.

Please click for the following documents on the ICAS website:

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