The Yomiuri ShimbunIt should mark an important step toward a more transparent audit system.
Audit reports, which put a seal of approval on a company’s financial statements, will now contain improved content.
The Financial Services Agency’s Business Accounting Council has revised the nation’s auditing standards.
A main pillar of the changes is that the “key audit considerations,” or things that an audit firm examines especially carefully, will in principle be mentioned in an audit report. While these rules will be applied from audits covering the settlement of accounts for the business period ending in March 2021, they could be adopted before then.
The overall direction of mentioning the points an audit firm focuses on and enhancing the audit report’s content seems to be reasonable.
Current audit reports in Japan basically are short written statements that mention only a conclusion on whether the content of a company’s financial statements was presented “properly” or “improperly.”
A spate of scandals, including revelations of improper accounting at Toshiba Corp., led to the unearthing of errors in financial statements that auditors had declared were recorded “properly.” These scandals seriously jolted confidence in audits.
This was because when someone read an audit report, they could not surmise that there were risks such as accounting irregularities. Distrust of audits was especially strong among shareholders and investors.
If the new standards boost the transparency and informational value of audit reports, it can be expected that investors and others will gain a deeper understanding of a company’s business conditions.
Ditch jargon in reports
When these rules are applied, it is vital that information valuable to shareholders and investors should be specified in an audit report.
Any collusion between a company and its audit firm must be ended, and any facts unfavorable to a company need to be disclosed, rather than concealed.
A report will contain matters that the auditor deemed, during the audit process, to be high risk, such as misrepresentations or misstatements. Such a report could become influential material for investors when they forecast a company’s future losses and other developments.
Such reports also seem to be useful in quickly detecting accounting irregularities and, eventually, contribute to bolstering confidence in audits.
It is essential that audit reports offer specifics and are written in easily understood language.
Reports that resort to prescribed expressions or are full of difficult jargon will lose much of their usefulness.
Content that is plainly written and informative should also lead to a favorable evaluation of the audit firm that wrote the report.
Auditing companies should vie with each other over the performance of their reports.
Investors and other people who use these audit reports also must improve their ability to accurately read the information they contain. They need to make sure they calmly analyze the meaning of what is written and not overreact to just a few words.
These reports also could become a chance to promote dialogue, such as at general meetings of shareholders, when attendees ask the management about the company’s financial situation. It will be important for the management side to offer sincere explanations in response to any comments or queries made by shareholders and others.