By Hayley Barker Hoogwerf
With the view that the reporting of historical financial information alone does not provide investors, shareholders and other stakeholders with a broad picture or holistic information about the reporting entity that these users may be looking for, EER continues to evolve. Along with the increased demand for more holistic reporting came the call for action to support credibility and trust in EER reports.
The IAASB responded to these calls for action and in August 2016, they issued the discussion paper: Supporting Credibility and Trust in Emerging Forms of External Reporting: Ten Key Challenges for Assurance Engagements. The purpose of the discussion paper was to inform stakeholders of the principal findings from the initial research and outreach activities undertaken on the global developments around EER frameworks and professional services being rendered in relation to EER. The IAASB also intended using the responses received from the discussion paper in determining how to meaningfully progress this project.
In January 2018, the IAASB issued a feedback statement: Supporting Credibility and Trust in Emerging Forms of External Reporting: Ten Key Challenges for Assurance Engagements to inform stakeholders of the key messages received in response to the discussion paper and the path ahead for this project. The IAASB indicated that the sharing of this information is an important part of the process in provoking further thought and discussion around EER.
A general overview of responses received
Key messages received from respondents where there was a majority consensus included the following:
- Although current demand for assurance on EER is limited, this is likely to increase as EER evolves.
- The use of ISA 720 (Revised) in enhancing trust and credibility of EER when included in an entity’s annual report is not sufficient and creates an expectation gap.
- Overall agreement with and additional insight into the IAASB’s understanding of (also refer to Overview of responses to specific questions below):
- The four factors that enhance credibility and trust
- The professional services and other external inputs provided or called for, to support the credibility of EER reports, and
- The ten key challenges
- The IAASB’s proposal to develop guidance in applying the existing international assurance standards rather than developing new standards, with the following key messages:
- Guidance on the ten key challenges would be helpful.
- The focus should be on guidance for the application of ISAE 3000 (Revised) rather than international standards for other types of engagements, although there was some support for the latter.
- Caution that any guidance developed should not suppress innovation in EER and related assurance engagements.
- The highest priority key challenges were the suitability of criteria; materiality; and form of the assurance report.
- ISAE 3410 is not widely used and there was little support for further subject-matter specific assurance standards at this point, with some respondents indicating support for this in future.
- The IAASB should continue to provide thought leadership on assurance issues and continue to coordinate its efforts with a wide range of other relevant stakeholders.
Overview of responses to specific questions
The discussion paper included nine specific questions on areas for the IAASB to consider in determining the way forward. In many instances, responses to these specific questions were covered in the general overview of responses received. A summary of the responses to the remaining questions is as follows:
Question 1: Factors that enhance credibility and trust
There was general consensus with the four key factors that enhance credibility and trust as identified in the discussion paper with additional insight provided on each of these factors, including the following:
- Factor 1 – A sound reporting framework: Key attributes of a sound reporting framework include transparency, the ability to drive consistency across time and between entities, and the need for the framework to be generally accepted.
- Factor 2 – Strong governance: The competence and accountability of preparers of EER reports are important to create credibility and trust, and entities should have appropriate and reliable information and IT systems.
- Factor 3 – Consistent wider information: Ensuring the completeness of EER reports would also contribute towards achieving consistency between various sources of information available, enhancing the credibility of the reporting.
- Factor 4 – External professional services and other reports: While regulatory involvement may increase trust in reports issued by professional services providers, practitioners’ competence, objectivity and independence are central to trust.
A possible additional factor relating to external user experience and education was identified in that there may be a need to educate users of EER reports, particularly to improve understanding of the different levels of assurance that can be obtained by external professional services and therefore reduce the expectation gap.
Question 2: Professional services that enhance credibility and trust
The discussion paper identified the following professional services covered by the IAASB’s International Standards that are most relevant to EER:
- Reasonable assurance engagement
- Limited assurance engagement
- Agreed-upon procedures engagement, and
- Compilation engagement
Other types of professional services identified by respondents were as follows:
- Benchmarking, for example where a professional benchmarks one EER report against another report that is considered to be best practice for a particular business sector.
- Expert opinions, which involve the evaluation of a matter, based on the expertise and experience of a professional accountant in circumstances in which the prerequisites of an assurance engagement either cannot be met or are not cost effective.
- Hybrid engagements, which can comprise an agreed-upon procedures type engagement being supplemented with additional assurance procedures, and
- Presentation type engagements,10 here the presentation engagement is mainly used to help small and medium-sized enterprises (SMEs) prepare their financial statements while providing a certain form of assurance on the latter. This engagement is specific to France.
Question 7: Ten key challenges in relation to EER assurance engagements
The ten key challenges identified in the discussion paper were as follows:
- Determining the scope of an EER assurance engagement can be complex
- Evaluating the suitability of criteria in a consistent manner
- Addressing materiality for diverse information with little guidance in EER frameworks
- Building assertions for subject-matter information of a diverse nature
- Lack of maturity in governance and internal control over EER reporting processes
- Obtaining assurance with respect to narrative information
- Obtaining assurance with respect to future-oriented information
- Exercising professional scepticism and professional judgement
- Obtaining the competence necessary to perform the engagement, and
- Communicating effectively in the assurance report
There was overall consensus with the IAASB’s analysis of the 10 key challenges and that guidance on these challenges would be helpful.
The way forward
In line with the proposals advanced by the respondents to the discussion paper, the IAASB plans to progress this project in the following areas:
- Develop non-authoritative guidance in applying the IAASB assurance standards to EER, specifically ISAE 3000 (Revised)
- Continue to provide thought leadership on assurance issues in relation to EER
- Co-ordinate the work of the project with related initiatives of other relevant international organisations
In January 2018, the IAASB issued a project proposal: Guidance on Key Challenges in Assurance Engagements over EER, which outlines their way forward in this area. In terms of the project proposal, the IAASB intends to develop non-authoritative guidance that addresses the ten key challenges. This project will be tackled in two phases with the first phase intended to result in the issue of an exposure draft of non-authoritative guidance addressing the key challenges allocated to this phase. In March 2018, a project advisory panel consisting of 23 individuals was established to assist the IAASB in the development of this non-authoritative guidance.
Based on the timeline contained in the project proposal, the exposure draft relating to phase 1 of this project is expected to be issued in December 2018.
Hayley Barker Hoogwerf is a Project Director: Assurance at SAICA