Category: Auditing and Related Services

Adding Credibility Through Assurance Services

June 1999

As we move towards the Millennium, business is living in a more transparent environment, where international stakeholders and other decision-makers demand reliable information, not only in written form but 'at the touch of an icon' from a company's web-site. These users need to have confidence that the information provided by an enterprise has credibility: that it has been prepared objectively and presented fairly by an organisation with sound corporate governance arrangements. Such credibility can be enhanced by independent professional accountants giving assurance on it.

The statutory audit gives assurance on financial statements prepared by management but is driven by the requirements of legislation. Historical financial statements are only one form of information: stakeholders increasingly look to other forms, both financial and non-financial. Reliance is often placed on chairmen's statements, operational reviews, forecasts, environmental reports, employee reports and interim information. In particular, directors are now urged to review not only the effectiveness of internal financial control, but the overall risk management systems, which are expected to include systems to prevent fraud.

Audit committees are a feature of most listed companies and many public sector bodies. In order to do their job properly on behalf of shareholders, they rely on both internal and external auditors reporting to them on the health of the organisation. In the private sector, these reports are provided privately to the directors; but, in the public sector, there is public reporting on such matters as value for money, corporate governance, and the arrangements in place to prevent fraud and to ensure quality information through effective systems of internal control.

With the globalisation of both business and securities trading, multinational corporations themselves, investors providing capital, securities commissions and stock exchanges regulating the markets and the World Bank are calling for harmonised international accounting and auditing standards. Indeed, the European Commission is driving towards a common set of standards throughout Europe, based on internationally accepted standards laid down by the International Accounting Standards Committee (IASC) and by the International Auditing Practices Committee (IAPC) of the International Federation of Accountants (IFAC).

This creates an unprecedented opportunity for the world-wide accountancy profession to demonstrate that its members can enhance the workings of the capital markets by ensuring that reports by professional accountants from all countries are clear and consistent and that they meet the needs of decision-makers.

To help it meet this challenge, IFAC - with the support of the professional accountancy bodies around the world - is putting significantly more resources behind IAPC in its development of International Standards on Auditing (ISAs).

To ensure its standards continue to meet public expectations and are deliverable by professional accountants, IAPC has established a basis for strategic consultation with bodies around the world with an interest in the operation of capital markets. This involves listening to such bodies as the European Commission, the World Bank and the International Organisation for Securities Commissions (IOSCO), and to groups that represent the international accountancy profession in all its spheres of activity, including publicly held corporations, the public sector and SMEs.

Further, IAPC has recognised the many new assurance services that are springing up due to the need for stakeholders to have confidence in the credibility of information being used by them. An Exposure Draft (ED) on 'Assurance Engagements' has recently been issued for comment.

An important theme in the ED is clarity of communication. The over-riding consideration, when a professional accountant reports on an assurance engagement, is the need to communicate clearly and unambiguously the level of assurance justified in the particular circumstances. To help achieve this, the ED encourages professional accountants to take a more flexible approach to reporting than is displayed in the standardised reporting formats currently used. In some cases, for example, it may be helpful to adopt a discursive style of report, to describe the subject matter being reported on, the criteria used for evaluating the subject matter and procedures carried out by the professional accountant and evidence obtained to support the level of assurance expressed.

This is a move away from traditional 'boiler plate' reporting and should help to narrow any expectation gap which arises as professional accountants begin to report in new areas, such as corporate governance, internal control, environmental issues, systems to prevent fraud, prospective financial information and information provided on the Internet.

Professor Ian Percy is Vice-chairman of the Auditing Practices Board and is the UK representative on the IAPC.