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ICAS finds “broad” support for positive assurance over the narrative content within annual reports

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08 Apr 2014

The Institute of Chartered Accountants of Scotland (ICAS) has today published a report (“the ICAS report”) setting out responses received to their ‘Balanced and reasonable’ discussion paper (DP), which recommended that the auditor should provide an explicit opinion that the management commentary in the annual report is balanced and reasonable. The findings indicate “broad support” from respondents with many audit firms considering that the provision of such assurance will become “inevitable” over time.

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 bias and does not provide users with an insight into the way in which the organisation is being directed. 

Currently there is no obligation for companies to have the 'front half' of annual reports audited.  However the new narrative reporting regulations have increased the attention stakeholders pay to the ‘front half’ of annual reports.  The ICAS DP ‘Balanced and reasonable’ focused on the provision of auditor assurance over the ‘front half’ of the annual report in the form of a new ‘Balanced and reasonable’ positive opinion over the narrative reporting of the board.  The DP also explored the challenges for the auditor of providing such an opinion and whether this would be feasible under the current International Auditing and Assurance Standards Board (IAASB) framework.  The debate on the provision of such assurance was further extended by the Institute of Chartered Accountants in England and Wales Narrative Assurance Working Party in their report ‘The Journey: Assuring all of the Annual Report?

The ICAS report ‘Assurance on management commentary – what next?’ continues along the same theme and suggests next steps for ICAS to take.  The ICAS report summarises the responses received to ‘Balanced and reasonable’ from respondents and participants in a number of events held by ICAS.  These included “nine of the current top 10 UK accounting firms”, “senior staff from the Financial Reporting Council (FRC)” and IAASB.

The ICAS report highlights that there is “broad support” for the proposals put forward by ICAS with many audit firms considering that the provision of such assurance will become “inevitable” over time.  It also highlights “some confusion” regarding user views as to how much and what type of assurance is currently provided by auditors under the Financial Reporting Council’s (FRC’s) ‘fair, balanced and understandable’ requirement, introduced as part of revisions to the UK Corporate Governance Code in 2012 and amendments to ISA 700 (UK and Ireland) 'The Independent Auditor’s Report on Financial statements'.

Although supportive of the proposals, respondents were “split” over whether they could be adapted to fit within the existing framework.  Many cited barriers to implementation such as whether auditors had the necessary skills and ability to undertake this type of work, the need to revisit the auditor liability regime and whether assurance could be provided on all of the information contained within the front half of the annual report.  Just under half of respondents (44%) also highlighted that there was a need to first identify that this type of assurance was required.  The ICAEW Narrative Assurance Working Party found that organisations are already asking for additional assurance reports aside from the traditional audit report on the financial statements.  The importance of demonstrating benefits compared to costs was also mentioned by 41% of respondents.

ICAS is keen to “promote a framework for corporate reporting and assurance which meets the needs of the users, primarily the investment community, at a cost which is acceptable”.  The ICAS report identifies a number of next steps to further this objective.  They comment:

A first step is to commission research into the changes observed in the current reporting and assurance environment. The findings from this research will form the basis of a discussion and interaction between auditors, preparers and investors to understand how the far the new regime has gone in meeting their needs and if they would like any further assurance to be provided

A number of other projects “under consideration” are also identified in the paper which can be downloaded using the links below.

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