Redesigning audit reports

Even though auditors are generally acknowledged as independent professionals having significant insight about the material aspects of the entity they audit, the existing reporting model has been found to be deficient in providing adequate information to the users of financial statements.

Evidently, audit reports could not indicate even the major financial or major corporate governance failures. The Public Company Accounting Oversight Board (PCAOB) of the US has issued a concept paper on June 21, 2011 seeking feedback from investors, financial statement preparers, auditors, audit committee members, regulators and standard setters and academia representatives on current auditor's reporting model by September 30, with a view to designing potential alternatives for an improved audit reporting model. The issue has been under active consideration by other standard setters and regulators including International Auditing and Assurance Standards Board, the International Organisation of Securities Commissions, the United Kingdom's Financial Reporting Council and the European Commission too.

The present auditor's reporting model can be at best described as a ‘pass or fail model' containing the nature of the audit, and auditor's opinion whether the balance sheet, profit and loss accounts and cash flow statements present true and fair in all material respects.

Alternatives models

The concept paper of PCAOB delineates four alternatives for possible changes to the auditor reporting model by adding Auditor's Discussion and Analysis; ‘Expanded Use of Emphasis Paragraphs'; auditor assurance on other Information outside the financial statements, and clarification of the standard auditor's report. These alternatives are not mutually exclusive and a revised auditor's report could include one alternative, a combination of all of them. PCAOB board will listen to a broad range of investors of all sizes and types as well as from investor representatives, audit committee members, financial statement preparers, analysts and others.

The Indian scenario

The oversight bodies' zero tolerance attitude towards audit deficiencies can only bring more professional scepticism, revamping of audit engagement and accountability regime in India Inc.

Under the Sarbanes-Oxley Act, 2002 and Dodd-Frank Act, 2010, the oversight bodies in the US have adequate oversight powers to protect the investors by monitoring effectively accounting firms that audit companies whose securities are traded in the US markets.

In India, despite having large number of regulators, in certain areas, even having overlapping responsibilities and jurisdictions, there is no oversight body like PCAOB or effective regulations like Dodd-Frank Act of 2010 to effectively inspect the public accounting firm's audits of brokers and dealers to identify significant issues and provide investor protection.

(The author is a Director General, CAG Office)