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ICAEW report explores the potential for assurance services to extend to the “front half” of annual reports

  • ICAEW (Institute of Chartered Accountants in England and Wales) (lt green) Image

02 Oct 2013

The Institute of Chartered Accountants in England and Wales Narrative Assurance Working Party (“the ICAEW Narrative Assurance Working Party”) has published a report exploring the potential for assurance services to be extended to cover, not just the financial statements, but the whole of the annual report.

For accounting periods ending on or after 30 September 2013, all companies (except those that are small) will have to comply with the new “narrative reporting” regulations issued by the Department for Business, Innovation and Skills (BIS) which, among other things, will require all companies to prepare a strategic report, replacing the current business review.  As well as disclosing information on the company’s strategy, business model and risks, quoted companies will also have to disclose information on human rights and diversity in the strategic report and greenhouse gas emissions in their directors’ report.  

Currently there is no obligation for companies to have this information audited but these regulations will increase the attention stakeholders will pay to the “front half” of annual reports.  

The ICAEW Narrative Assurance Working Party report “The Journey: Assuring all of the Annual Report?” explores the “challenges and opportunities involved in assurance over the annual report” and is an extension of the debate held by The Institute of Chartered Accountants of Scotland (ICAS) in their discussion paper; “Balanced and reasonable” which recommended 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 ICAEW comment that trust in business information can be achieved through assurance on the whole of the annual report and are of the opinion that this is also achievable. 

Adding to the weight of their argument, the ICAEW comment that organisations are already asking for additional assurance reports aside from the traditional audit report on the financial statements and hence this “indicates that there is a market need for more assurance than is required by law”. 

The ICAEW Narrative Assurance Working Party report puts forward four scenarios for assurance over the narrative part of the annual report:

  • No assurance is given over any part of the annual report apart from the financial statements. 
  • The audit report is accompanied by an assurance report covering one or two other aspects of the financial statements.
  • The audit report is accompanied by an assurance report covering most of the rest of the annual report.
  • A single assurance report replaces the audit and gives one opinion over the whole of the annual report. 

Details are provided for each of these proposed scenarios and an analysis of how this may be achieved.  The first scenario is the current situation for many companies and the last scenario is the ideal where there will be one provider assuring the whole of the annual report and only one opinion. 

The ICAEW Narrative Assurance Working Party recognise that there will be challenges to be addressed before assurance over the whole of the annual report can be provided.  They raise five key questions that need to be answered before “an assurance opinion is to be provided over narrative reporting at all”: 

    1. What does ‘fair, balanced, and understandable’ mean in practice?
    2. How can a business preparing an annual report, and their assurance provider, know what the content of the annual report should be?
    3. How do a business preparing an annual report, and their assurance provider, decide what is material in a narrative report?
    4. How can an assurance opinion on risk disclosures conclude that they are fair, balanced and understandable?
    5. How can an assurance opinion over forward-looking information be supported with evidence? 

The report will be followed up at a later date, exploring the issues identified in more detail. 

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