A study of the evolution of the form and content of UK audit reports over, say, the past 50 years would make nostalgic but intriguing reading because it would at the same time reflect changing public and investor expectations of the audit function.
Under the Companies Act 1948 audit reports were required, positively, to include confirmation that proper accounting records had been kept, that the books and accounts were in agreement and that adequate returns from branches had been received. Reforms in the ’60s relegated all this to the “exception reporting” category, leaving a standard blueprint that stretched to all of 3 lines, confined to an opinion on the Act’s most basic requirement that the accounts comply with prescribed disclosures and give a true and fair view of the results and state of affairs.
The stated purpose of this change, which left reports uncluttered by routine confirmations, was to allow any audit qualification to stand out in stark contrast to the expected norm.
The same situation existed in the USA, and Profession Lee Seidler of New York University highlighted its absurdity in a paper on the brevity of audit reports. Based on data supplied by one of the (then) “Big 8” firms, this revealed that each of its five largest clients consumed, on average, 94 man-years of audit time, while the average length of the ensuing audit reports was 142 words. He concluded with the wry observation that “nowhere in the entire realm of investigative reporting is there a parallel for such lavish scrutiny to result in such miniscule output”.
After a few juicy corporate scandals and some nasty judgements in liability cases, the profession’s committees got to work on remedying the so-called “expectation gap”. Curiously, they began with small company reports, which then incorporated a standard health warning: “In common with many businesses of similar size and organisation, the company’s system of control is dependent on the close involvement of the directors”, and whenever independent audit corroboration was not possible, reliance was placed on directors’ representations.
Like any standard formula its significance was quickly lost and, as an excuse for skimpy auditing, it also failed in the Courts. The problem was then tackled from the other end by expanding audit reports to include a mini-dissertation on directors’ and auditors’ respective responsibilities.
The latest tampering
The latest initiative is a complaint from the Audit Quality Forum (AQF), representing investors, companies and accountants, that audits have become commodity services that do not generate useful information. Personally, as an investor, an opinion that the accounts are true and fair, assuming it is given after a thorough and competent audit, is the most useful information I could possibly want! But the AQF complains that the lengthy audit attestation has taken on a “boiler-plate” format which no longer gets any attention from investors. What do they want? Jokes?
They say they want more information in the audit report on risks and uncertainties relating to the numbers, particularly where these arise from subjective judgements on revenue and cost recognition. Well, if those issues are material, truth and fairness already dictates disclosure in the accounts. But here it comes: the AQF now want auditors to sign a new statutory statement that “there are no matters of emphasis” to which they wish to draw attention.
This is what happens every time auditors stray into territory beyond the traditional remit that has stood the test of 60 years on the statute book, despite all these intermittent frolics.