Accounts: Free from material misstatement

Accounts: Free from material misstatement

“The auditor’s objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement.”

That is the opening comment on the Financial Reporting Council’s (FRC) description of an auditor’s responsibility in respect of financial statements. The statement goes on to set out key areas of oversight including identifying and assessing the risk of material misstatement, obtaining an understanding of internal controls and evaluating whether the presentation, structure and content of financial statements gives a true and fair view.

Those who have been on the receiving end of a company audit will be fairly familiar with this process as auditors question and observe, check audit trails and ask for confirmation of a selection of income and expenditure items. And indeed the audit process can be invaluable to a company, highlighting potential areas of risk or in some cases even suggesting a more tax-efficient accounting methodology for certain accounting items.

Nevertheless the FRC’s description also highlights the fact that there is no guarantee that an audit will always detect a material misstatement. And certainly in 2018 there have been a number of instances where this has been the case. Indeed in a recent speech the Chair of the BEIS Committee (Business, Energy and Industrial Strategy) commented that “Recent accounting scandals at BHS, Carillion, and at Patisserie Valerie have shown accounts bearing closer resemblance to works of fiction than an accurate reflection of the true financial performance of the business.”  As a result there are now a number of ongoing reviews into the audit profession and the efficacy of audits including an internal review by the FRC and one by the Competition and Markets Authority as well as an overarching external review of the FRC led by Sir John Kingman.

Now BEIS have announced a further review which is intended to pick up on the outcomes of the Kingman and CMA reviews and take steps to ensure that proposals are swiftly acted on. The BEIS review is expected to start hearing evidence in January 2019 and in the interim has called for written submissions on six key points including:

  • The relationship between competition and quality in the audit market.
  • To what extent do conflicts of interest undermine trust in audit?
  • Are the proposed reforms of audit consistent with other recent reforms of corporate governance?

Launching the enquiry BEIS Chair, Rachel Reeves MP, said “Misleading audits have been at the heart of corporate failures over recent decades” adding that “doing nothing to fix the ‘broken audit market’ is no longer an option.”

 

 

Nick Lindsay
nick.lindsay@gmail.com
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