There has been a lot of criticism of financial reporting and of audit in the wake of the economic crisis, which has been further compounded this week by the House of Lords report on audit, where they used words like ‘culpable’ about the big four and their audits of banks, and where they attacked the use of IFRS in UK corporate reporting as well as criticising the competitive landscape of the audit business in strong terms.
As you might expect, we have strong views on the subjects – whilst the Lords material on bank audits and competition hogged the headlines, their views on IFRS were also controversial.
The Lords were critical of IFRS, particularly in relation to it’s perceived lack of prudence, and urge that UK GAAP be preserved until IFRS is effectively more fit for purpose.
Our report, The Future of Corporate Reporting and Assurance, sets out a vision for one framework of global accounting standards, based on IFRS, but with the unintuitive parts of it amended.
This vision for the future of financial reporting is underpinned by:
For these reasons we do not believe that the introduction of a separate financial reporting standard for medium sized entities, based either on full IFRS nor on UK GAAP, is a good idea, but is potentially a source of cost and confusion.
In terms of the future of auditing, we support the audit becoming voluntary for smaller businesses, but contend that for the largest businesses statutory audit should be augmented by further assurance on narrative and on other market communications.
Above all, we think this is a good moment for regulators to go back to all users of corporate reporting and ask what they really want and what assurance they want around it. Only then will criticism of the financial reporting framework be effectively dealt with and the ‘expectation gap’ between what audit actually provides and what some users expect will be closed.