PART 2: EMERGING FORMS OF EXTERNAL REPORTING (EER)
The board of directors of a company drive the company’s external report content. Without legislative requirements, they can steer decisions on what type of assurance, if any, is required on the information reported. By Ciara Craul Reintjes
Integrated reporting, a subset of emerging forms of external reporting (EER), is pervasive in South Africa. This article considers sections IV and V of the IAASB’s discussion paper Supporting Credibility and Trust in Emerging Forms of External Reporting: Ten Key Challenges for Assurance Engagements (the DP).
RELEVANT ENGAGEMENTS AND CURRENT PRACTICES
The DP’s section IV discusses relevant professional services engagements in the area of EER covered by the IAASB’s International Standards , which allow for:
- Reasonable assurance
- Limited assurance
- Agreed-upon procedures, and
Professionals have begun to respond to the demand to enhance the credibility of EER reports by providing less standardised professional services such as consultancy, assurance readiness, maturity assessments, and expert insights report engagements not catered for in the International Standards.
In the context of EER assurance, the following questions arise:
- How is sufficient appropriate evidence obtained?
- What types of assurance engagements can be performed?
- Are the International Standards sufficient, or are there other types of professional services the IAASB needs to consider?
Diagram 1 The relationship between financial reporting and EER frameworks
TEN KEY CHALLENGES
In section V, the DP summarises the ten key challenges that were identified in relation to the performance of EER assurance engagements, including proposals for further guidance. The proposals, the crux of the DP, effectively set out the roadmap for future guidance.2
The DP refers to several existing International Standards, from which content may be adapted for the context of EER. ISAE 3000 (Revised), Assurance Engagements Other Than Audits or Reviews of Historical Financial Information, is referenced as it was developed as an umbrella standard, anticipating application in a range of possible engagements.
CHALLENGE 1 DETERMINING THE SCOPE OF AN EER ASSURANCE ENGAGEMENT CAN BE COMPLEX
The scope of an EER assurance engagement, which must have a rational purpose, may be broad. ISAE 3000 (Revised) is flexible in scope as, for example, the engagement may be limited to parts of the integrated report.
Proposal: Explore further guidance on acceptance considerations.
CHALLENGE 2 EVALUATING THE SUITABILITY OF CRITERIA IN A CONSISTENT MANNER
Suitable criteria (to evaluate the information against) are reliable, relevant, complete, neutral and understandable. Ambiguity may arise, leading to management bias. Professional judgement and professional scepticism need to be applied. ISAE 3000 (Revised) does not detail how to assess the suitability of criteria.
Proposal: Explore whether additional guidance on evaluating the suitability of criteria is required.
CHALLENGE 3 ADDRESSING MATERIALITY FOR DIVERSE INFORMATION WITH LITTLE GUIDANCE IN EER FRAMEWORKS
As users and their information needs may be diverse or unknown, assessing materiality may be challenging. EER also has no common unit of measurement. ISAE 3000 (Revised) is framework-neutral and therefore provides only high-level guidance on materiality.
Proposal: Explore whether additional guidance to assess materiality and materiality on future-oriented and narrative information is required.
CHALLENGE 4 BUILDING ASSERTIONS FOR SUBJECT MATTER INFORMATION OF A DIVERSE NATURE
The diversity of EER subject matter information (evaluated against criteria) makes it challenging to develop appropriate assertions. As ISAE 3000 (Revised) is framework-neutral, it does not set out all possible assertions for all EER frameworks.
Proposal: Explore whether additional guidance to develop a methodology to build relevant assertions is required.
CHALLENGE 5 LACK OF MATURITY IN GOVERNANCE AND INTERNAL CONTROL OVER EER REPORTING PROCESSES
Reporting systems may not be robust, with appropriate controls and oversight in place. It may therefore not be possible to assure the EER report.
ISAE 3000 (Revised) requires the practitioner in a reasonable assurance engagement to obtain an understanding of internal control over EER processes relevant to the engagement and to evaluate their design and implementation.
Proposal: Explore whether further guidance to address how to evaluate the maturity of systems, controls and oversight is required.
CHALLENGE 6 OBTAINING ASSURANCE WITH RESPECT TO NARRATIVE INFORMATION
Narrative information may be factual or subjective. It may also include management judgements and be more susceptible to management bias.
There are no specific standards for addressing narrative information in an assurance engagement.
Proposal: Explore whether further guidance on narrative information is required.
CHALLENGE 7 OBTAINING ASSURANCE WITH RESPECT TO FUTURE-ORIENTED INFORMATION
Future-oriented information may address future conditions, events, outputs and outcomes, resulting in uncertainty. There may be no suitable criteria and an assurance engagement may be impossible.
Proposal: Explore whether further guidance in assessing future-oriented information is required.
CHALLENGE 8 EXERCISING PROFESSIONAL SCEPTICISM AND PROFESSIONAL JUDGEMENT
More areas with a need to apply professional judgement and professional scepticism may arise when using EER frameworks, with information being subjective, resulting in management bias.
Given that the IAASB currently has a project regarding professional scepticism, the proposal is to defer exploring this challenge.
CHALLENGE 9 OBTAINING THE COMPETENCE NECESSARY TO PERFORM THE ENGAGEMENT
The complexity of an EER assurance engagement requires broad specialised subject matter competence.
ISAE 3000 (Revised) addresses competence in general terms.
Proposal: Explore whether the need to communicate explicitly about the competence of the engagement team in the assurance report exists.
CHALLENGE 10 COMMUNICATING EFFECTIVELY IN THE ASSURANCE REPORT
It is challenging to communicate effectively the practitioner’s conclusions other than in a general manner not tailored to the types of information presented (for example ‘has been properly prepared, in all material respects, in accordance with XYZ criteria’).
ISAE 3000 (Revised) describes the required content elements of an assurance report. As a framework-neutral standard, it allows for flexibility in preparing and structuring assurance reports.
Proposal: Explore whether further guidance to address reporting considerations in the EER environment is required.
RESPONDING TO THE CHALLENGES
IAASB’s proposed approach
Many of these challenges will likely require further conceptual analysis. As EER frameworks and reporting processes mature, the IAASB believes it may be too early to develop a definitive standard. It intends to explore whether additional guidance to enable practitioners to apply ISAE 3000 (Revised) more effectively is required.
The Independent Regulatory Board for Auditors (IRBA) will schedule forums to obtain feedback on the DP from stakeholders for inclusion in its comment letter, due by 15 December 2016.
A task group will provide guidance in addressing some or all of the key challenges. This guidance could address discrete challenges, with the potential of later assembling the parts of the machine – the piecemeal guidance issued – into one authoritative pronouncement.
Stakeholders are encouraged to respond to questions 1–9 of the DP and provide input on these proposals:
- Audit committees are challenged to consider the need for and type of assurance on the integrated report.
- Investors may fuel the demand and provide the momentum needed.
- Preparers should consider if the information disclosed can be assured.
- Those in governance roles should consider the maturity of their reporting processes and controls.
- Practitioners should accelerate the development of competencies in subject-matter specific specialities.
- Internal auditors should assist those in governance roles with fast-tracking the maturity of systems.
- Standard-setters and regulators should consider legislating the need for assurance on EER reports, and
- Academics should consider the proposals and provide thought leadership.
As Henry Ford steered the mode of travel from horses to cars, the board of directors of a company provide the energy and velocity needed for achieving assurance on EER.
AUTHOR |Ciara Craul Reintjes CA(SA), RA is Senior Professional Manager: Standards at the IRBA