Auditing in hard times

OPTIMISTICALLY CAUTIOUS By ERROL OH

HOW bad will things be this year? Everybody has some thoughts on that, but nobody really knows, of course. But if you're thinking of turning to the accountants and auditors for some reassurance and optimism amid the gloom, you're definitely barking up the wrong tree.

The fact is, this fraternity is already bracing for the worst and is calling upon members to be on the lookout for signs of trouble as they carry out their work.

On Dec 28, the International Auditing and Assurance Standards Board (IAASB), the New York-based independent standard-setting body, issued a press release to draw attention to the challenges that accounts preparers and auditors currently face.

“The global economy continues to experience difficult conditions as the effects of the financial crisis for example, on corporate cash flows and access to credit persist. Volatility in capital markets, and issues including measurement and disclosure of exposures to sovereign debt of distressed countries, continue to create uncertainty,” says the board.

“The impact of these issues and uncertainty has wide-ranging financial reporting implications that often extend beyond national borders.”

The IAASB points out that such conditions make it challenging for management of entities, those charged with governance, and auditors to do their jobs.

According to the board, among the tough aspects of this groups' responsibilities are assessing an entity's ability to continue as a going concern and making relevant disclosures in the financial statements and auditor's report.



(In accounting, the going-concern concept assumes that an entity will continue operating indefinitely. Therefore, its accounts are prepared accordingly and there's no need to reflect the possibility that the entity will soon grind to a halt and its assets sold off.)

The board reminds auditors of the requirements of the International Standards on Auditing (ISAs). It adds that in every assignment, an auditor must weigh whether it's appropriate for the management to use the going-concern assumption.

Said IAASB chairman Professor Arnold Schilder: “Difficult economic conditions give rise to many important audit considerations, but none more important or more difficult than evaluating management's assessment of an entity's ability to continue as a going concern and determining the appropriate auditor reporting in the circumstances.”

What's interesting is that the board has asked auditors to refer to a three-year-old document titled Audit Considerations in Respect of Going Concern in the Current Economic Environment.\

“While this Audit Practice Alert was released in context of the 2008-2009 credit crisis, many of the matters addressed in it are equally relevant today,” said Schilder.

“For example, an entity may be experiencing a decline in its financial health, or may have material uncertainties arising from direct or indirect exposures to sovereign debt of distressed countries. Auditors are therefore encouraged to review the Alert and, importantly, the relevant requirements in the ISAs.”

On Wednesday, the Malaysian Institute of Accountants (MIA) came out with a circular that's largely based on the IAASB press release.

Says MIA executive director Ho Foong Moi in the circular: “Auditors in Malaysia similarly should take cognisance of the currently-challenging global economy and accordingly must remain alert throughout the audit to identify and critically examine evidence of events or conditions that may exist nationally or globally which may cast significant doubt on an entity's ability to continue as a going concern.

“Auditors must continue to exercise professional scepticism and judgment in evaluating financial-statement disclosures and the implications for the auditor's report when a material-uncertainty exists relating to events or conditions that, individually or collectively, may cast significant doubt on the entity's ability to continue as a going concern.”

So, the message is clear these days, auditors have to be more questioning about the standard-management assumption that a business is in a position to go on and on. After all, which management will readily admit that the entity is reaching the end of the road?

The truth is, many businesses fail, even in the best of times. And when the economies and industries go through rough patches, it's harder to hide flaws in business models and weaknesses in how businesses are run. And when this happens, many people depend on the accountants and auditors to raise the red flags.

Therefore, the huge economic uncertainties we're experiencing now are as much a test of the profession's alertness and integrity as they are a test of the businesses' strength and resilience.

Executive editor Errol Oh didn't like tests when he was in school and that hasn't changed. But now he at least recognises that testing serves a purpose.