The art of conversation: the expanded audit report

Abstract

The new generation of expanded audit reports includes disclosures about significant matters in a company's financial reporting and its audit. These disclosures are a landmark change in auditors' responsibility to provide information to the public. I examine expanded reports in various jurisdictions, why they became mandatory, what the evidence from their implementation is, and whether they have fulfilled the expectations of regulators and other stakeholders. Expanded reports are intended to increase the information content and usefulness of audit opinions, to increase external monitoring of auditors and management, and to foster a more open conversation between auditors and users of financial reporting. However, existing regulatory requirements, conflicting auditors' incentives to provide new information, and evidence from the expanded reports' implementation call into question whether these objectives have been met. It is my hope that expanded reports are only a first step towards enhanced auditor reporting.

Key audit risks and audit procedures during the initial year of the COVID-19 pandemic: an analysis of audit reports 2019-2020

“…description of the matter and the audit procedures) does provide incremental information beyond other disclosures already made by the audited entity; however, the application of ISA 701 (IAASB, 2015) gives auditors little opportunity to provide any “original information” (Minutti-Meza, 2021). Thus, there is some debate on whether KAM disclosures in audit reports do deliver “new” informational value to investors, as prior academic research has reported mixed findings (Lennox et al , 2018; Sirois et al , 2018; Zeng et al , 2021; Seebeck and Kaya, 2021; Minutti-Meza, 2021). Future research investigating whether KAM disclosures enhance the communication between each of the related parties, the audit committees (Oussii et al , 2019), the external auditors and the financial statement users, specifically during a global crisis (like the COVID-19 pandemic), will provide helpful knowledge for policymakers in most jurisdictions.…”

“…In the company’s 2017 expanded report (fiscal year ending on 31 December 2017), Ernst and Young (EY) included four KAMs (pp. 290–294) related to: the acquisition of a business; valuation of goodwill; valuation of customer relationships; and recoverability of receivables and presentation of revenues from acquiring partners (Minutti-Meza, 2021). …”

“…However, none of these KAMs conveyed a heightened level of risk that would meaningfully alert the company’s investors (Minutti-Meza, 2021). In the company’s 2018 expanded report (fiscal year ending on 31 December 2018), EY included a new KAM related to allegations of misreporting by a whistle-blower in Singapore (EY, 2019, p. 219).…”

“…However, the KAM’s text ends with the conclusion that “our audit procedures did not lead to any reservations regarding the accounting treatment of matters on the basis from investigations, which were performed in response to allegations of a whistle-blower in Singapore” (EY, 2019, p. 219). Thus, while the issue is mentioned, there is no sense of urgency in the discussion of this highly irregular matter (Minutti-Meza, 2021).…”

“…Previous research has found that KAM disclosures are useful to shareholders or potential investors (Christensen et al , 2014; Köhler et al , 2016). Expanded audit reports are intended to increase the information content and usefulness of audit opinions, to increase external monitoring by auditors of management and to foster a more open conversation between external auditors and the users of financial reporting (Minutti-Meza, 2021). For instance, Seebeck and Kaya (2021) find that a higher level of specificity in KAMs is positively and significantly associated with short-window capital market reactions.…”