New auditing standards to protect investors
Australian companies could see more red flags raised over their financial accounts as part of tough new auditing rules set to be rolled out worldwide.
The shake-up in standards would give auditors more scope to raise concerns about the financial health of a company and alert investors to critical areas of interest.
The changes follow a recent study which found auditors identified growing concern issues in 15 per cent of Australian-listed companies last year.
While global audit rule changes were under way before the global financial crisis hit, the proposals which have been set out by global auditing regulator - the New York-based International Auditing and Assurance Standards Board - were largely shaped by economic turmoil.
Arnold Schilder, chairman of the International Auditing and Assurance Standards Board, said while a review through the financial crisis failed to uncover evidence of systemic failures of audits, the crisis still prompted questions over the role of auditors in scrutinising accounts.
‘‘If (audits) had done what they were supposed to do and it was not much help in protecting investors, or setting alarms off before the crisis, what then is the role of the audit function?,’’ Professor Schilder said.
He was speaking to BusinessDay ahead of a series of meetings this week with the chief financial officers of Australia’s biggest companies, and bank regulator the Australian Prudential Regulation Authority.
Among changes under proposed rules, auditors would be required to issue a short comment about the accounts and where most of the audit attention was focused. This commentary could provide more colour about potential uncertainties or risks sitting in the accounts, Professor Schilder said.
The changes ‘‘provide an opportunity for the auditor to speak out about the most important issues,’’ Professor Schilder said.
Still, critics of the changes argue that the additional auditor opinion could lead to a blurring between management responsibility for financial statements and the role of the auditors. Meanwhile, auditors themselves fear more discussion could open them up to legal action from investors or even the companies they are auditing.
Still, Professor Schilder believes greater scope for opinion can work to protect the auditing industry, particularly as they are often first to be blamed in the aftermath of a company collapse.
‘‘These changes allow the auditor to speak out about the most important issues,’’ he said.
Auditing standards in Australia are set by the government-backed Auditing and Assurance Standards Board, with the rules enforced by corporate watchdog, the Australian Securities and Investments Commission. Like most key financial regulations, rules here are being aligned with global standards.
Merran Kelsall, the chairman of the Auditing and Assurance Standards Board said the proposed rules in particular would raise more red flags on Australian companies that are heavily dependent on asset valuations to support their financial accounts. In Australia, a feature of a number of corporate collapses through the global financial crisis were over-inflated values of assets sitting in the financial accounts.
‘‘In this brave new world (the proposed rules) would provide some greater signposts towards the judgements being made by management coming up with complex valuations,’’ AASB’s Ms Kelsall said.
The proposed rules have been put out to consultation and are expected to be finalised mid-next year.