The International Organization of Securities Commissions is encouraging audit firms to be more transparent to investors about their practices by producing a new kind of report.
The report, Transparency of Firms that Audit Public Companies, addresses the subject of audit firm transparency reporting. For the report, IOSCO considered the practices used by audit firms to be transparent in their own reporting to investors and other stakeholders about the firm itself, particularly with respect to firm governance and elements of their system of quality control for their financial statement audits.
Transparency reporting can foster internal introspection and discipline within audit firms and may encourage audit firms to sharpen their focus on audit quality, which would be of benefit to investors and other stakeholders, IOSCO noted. In comparing audit firms competing for an audit engagement, audit firm transparency reporting can help those responsible for selecting a public company’s auditor in their decision making process by providing information on a firm’s audit quality.
The report includes an IOSCO statement and guide for audit firm transparency reporting to serve as a frame of reference for promoting good practice and contributing to high quality audit firm transparency reports.
IOSCO believes an audit firm transparency report could be considered of high quality if the information in the report includes, among other matters, reporting on the audit firm’s legal and governance structure; the audit firm’s measures to foster audit quality; the audit firm’s internal indicators of audit quality; and the audit firm’s indicators of audit quality as generated by the work of external bodies.
An audit firm transparency report should provide information that is clear, useful and presented in sufficient detail to be meaningful to the different groups of likely users of the report, according to IOSCO. The report should be fact-based, unbiased and not oriented toward marketing or selling services.
In addition, the report should be concise, specific to the firm and avoid the use of boilerplate language. The report should also be timely, accurate and complete. It should be balanced in communicating the audit firm’s output measures of audit quality in addition to any input measures. The report should also explain the limitations of the indicators of audit quality, including that the indicators may not be comparable across audit firms.
To prepare the report, IOSCO sponsored a roundtable on the quality of public company audits from a regulatory perspective, issuing a public consultation paper and analyzed the 21 comment letters it received. IOSCO also received input from several oversight bodies and others involved in audit work. In addition, the organization conducted research on current audit firm reporting practices and related regulatory reporting requirements within certain IOSCO member jurisdictions.
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