With the global economic downturn precipitated by the financial collapse of individual companies and governments, there has been an increased call for greater transparency in the publicized financial statements. Such a role has always been a reserve of the auditor, and it is always undertaken in the form of an audit report. The audit report is the sole form of guarantee that a shareholder or a stakeholder has regarded the audit (Jones, 2012). The audit report is normally presented in a single page with other company’s reports including the financial statement. The increased need for financial transparency and understandability of financial statements has required the accounting and auditing profession to re- check the auditors responsibilities with the aim of expanding their reporting undertaking (Fraser, Zhang & Derashid 2006).
Global accounting and auditing oversight bodies have come up with a number of proposed changes that are aimed at improving the auditor’s report. Some of these changes include the proposal to include a section within the audit report where the auditor would provide additional commentary on matters that he or she or the firm deems necessary for users to understand the financial statements. It is commendable that the IAASB has acknowledged the users as the most important consumers of the information contained in the financial statements. However, users of the financial statements are varied and thus they may correspondingly have varying needs. The need to highlight the matters that are important to users thus will have to incorporate all the varied users of an organization’s financial statement. For example, the government as users of financial statements will have different knowledge needs from an individual investor (Craighead & Ketchen, 2009).
To implement this recommendation fully, the audit report will thus have to segment the different users of financial statements and highlight matters that are important to each segment of the individual user. Again this suggestion seems to check on the length of the final audit report. However, the downside of such an approach is its accompanying biasness. It should be considered that audit reports are supposed to be objective. The option for discretion will also have a bearing on the important subject of the auditor’s independence especially. This is especially done when selecting the criteria that will be used for the purposes of applying the discretion policy.
Another proposal to improve the contents of the auditor’s report includes that of accessing the management’s use of the going concern assumption and its appropriateness in application on the preparation of financial statements. The recommendation is necessary especially in the wake of the increasing scrutiny that auditors have been subjected to as a result of their failure to give warnings on the collapse of banks during the financial crisis (Jones, 2012). Such a recommendation if successful would be implemented through the use of a sectional heading titled “Going Concern”. The challenge that would be faced in this regard will be jurisdictional in nature. For example, in some jurisdictions, the terms “material uncertainty” that is indicative of an organization’s going concern capacity, is usually replaced by “substantial doubt” or “significant uncertainty”. The uniformity of financial audit reports would be compromised of IAASB roles is the promotion of the application of similar accounting and auditing practices around the world to encourage uniformity hence comparability. Such change in terminologies can provide legal loopholes that can be exploited to the detriment of the organization (Bailey, Joseph, & Michael, 2003).
Other proposed alterations to the audit report include the clarification of management and auditor’s responsibility and notification of any existence of inconsistency between the information provided by the management and the audited financial statements. This helps management in making decisions concerning future financial management. Additionally, it helps them in reducing factors contributing to losses (Foo, 2002).
Proposed improvements are meant to help the users of the auditor’s report to better understand its contents, and have other roles. This notion again poses an ethical challenge to the audit profession. Does it then imply that the traditional audit reports have been less meaningful to their intended users? How then do auditors justify the extensive amount of time that they have been spending at the client’s sites and the corresponding amount of audit fees? The most tangible result of an audit and that which the client pays for is the final audit report. While effecting such changes, such possibilities of disrepute to the profession should also be addressed, especially while transiting between the traditional format of the audit statement and the new format (Ebaid, 2009).
It is professionally argued that, such changes in the reports format are only meant to improve the report’s aesthetics, but in the real sense, add no additional value in terms of content to the report. A good example is the proposal to transfer the auditor’s opinion to a more strategic location within the report. The value that such an amendment adds to the report is difficult to quantify, and to prove to the users (Ken, 2012). Naturally, it is expected that, members of the audit profession would also want to increase their audit fees in lieu of the enhanced value of the auditor’s report. Such a move by members of the profession would have the resultant effect of watering down the implied perception that the proposed changes were meant to benefit the end user’s of the report. It might be viewed as just another means through which auditors want to charge exorbitant audit fees (Cui & Mak, 2002).
Thus, in suggesting and even implementing the proposed improvements, a lot of user education has to be first conducted for the consumers of the audit services in regards to the real value that the proposed changes will add to the current form of audit reporting. Such are the challenges that need to be addressed before implementing the proposed changes.