Making a case for extended audit report in Bangladesh

Since October 2013, auditors in the UK have been issuing a new style of extended audit reports for certain listed companies. This is due to the new standard prescribed by the Financial Reporting Council (FRC) in the UK in 2013 that requires audit reports to be more informative. The new standard establishes requirements and guidance for the auditor's determination and communication of 'key audit matters'.
Key audit matters would include issues such as the notion of 'materiality' that is applied in the planning and performance of audit. The new standard requires the audit report to disclose the materiality threshold used for a particular audit. Disclosures regarding the scope of audit, including an explanation on how this was affected by the auditor's assessment of risk and the application of the materiality threshold, are also required. Also, if the auditors find any inconsistency between the director's statement and the knowledge gathered by them during the course of audit, it should be disclosed. In exceptional circumstances, if the auditors feel that the audit committee report does not appropriately address the matters communicated to them, this needs to be pointed out as well. Another important addition to the audit report is a description of the auditor's responsibilities in the financial statement audit with respect to 'other information' contained in the first part of the annual report and the auditor's conclusion regarding the outcome of those responsibilities.
 The standard also requires an explicit statement regarding the auditor's independence and the sources of the independence requirements. Another interesting change required by the International Standard Auditing (ISA)-701 is the requirement for audit report to be signed by the actual engagement partner (rather than by the audit firm). Also, the auditors' opinion needs to be placed in a prominently in the audit report.
Overall, the changes in the new audit report in the UK are aimed at ensuring better transparency by communicating to shareholders what the auditors have found. However, whereas the UK is considered by many to be the forerunner of such developments, similar efforts are also being undertaken in different parts of the world.  In July and August 2013 respectively, the International Auditing and Assurance Standards Board (IAASB) and the Public Company Accounting Oversight Board (PCAOB) in the USA initiated consultations on the new format of audit reports. Key proposals include additional reporting on important or critical audit matters with a view to bringing more transparency in the matters which have most significant impact on the audit process.
The need for change in the audit report format arose from the financial crisis of 2008. Amongst others, the crisis exposed the misunderstanding in the minds of the investors regarding the role of the auditors. Investors were also concerned regarding the usefulness of the audit reports in the prevailing format. In particular, concerns were raised about whether the binary (i.e., pass/fail) auditor's report continued to be fit for the purpose of providing adequate transparency about the audit and the auditor's insights about the company, based on his work. As a response to the crisis, various regulatory bodies initiated consultations with key stakeholder groups to find out ways of making the auditors' report more informative. Subsequently, the ISA 701, requiring extended disclosures in the auditor's reports, was issued.
In Bangladesh, the format of audit report has remained the same for many years. The format, suggested by the Bangladesh Securities and Exchange Commission, has been criticised by professional auditors for its failure to comply with international standards. The predominance of family ownership in the corporate sector in Bangladesh has led to the development of a corporate culture where the value of an audited financial statement is often undermined and misunderstood. Many companies in Bangladesh consider the mandatory requirement for audited financial statements to be a financial burden, and are only willing to pay minimal amount in terms of audit fees. Consequently, audit fees in Bangladesh, even in comparison with neighbouring countries, have remained significantly low, and many audit firms have at times struggled to provide quality services in exchange for such low fees. This, in turn, has created doubts over the usefulness of the audited financial statements. Research evidence suggests the presence of a significant gap in audit expectations in Bangladesh. This means that the actual performances of the auditors are significantly different from the performance expected by different stakeholder groups. There could be two reasons for the existence of the gap. Firstly, under-performance of the auditors, and secondly, unreasonable expectation of the stakeholders from the auditors. This gap can be attributed to a gross misunderstanding regarding the role of the auditors. Unfortunately, in Bangladesh, such misconceptions exist amongst many stakeholder groups, ranging from small investors to policy makers in important positions. At times, presence of such confusion can prove to be costly for the profession, as it leaves the professsion potentially exposed to threats of unwarranted regulations. This is where increased disclosures, in the form of extended audit reports, can help.  
The new format of the audit report clearly mentions the scope of the auditors' work and the level of assurance provided in the annual reports. Thus, the auditors' report would explicitly mention that the statements made by the management, along with other reports, such as CSR reports, are outside the scope of the audit, although such information may have been considered by the auditors during the course of the audit. This should clarify any misunderstanding regarding the role of external audit. Some investors in the capital markets in Bangladesh seem to have a notion that the auditors are to blame for the losses they sometimes incur by investing in the shares of some listed companies. In many cases, this is due to the inherent nature of the capital market.
The new audit report format allows audit firms to be able to clarify this.  Consequently, users may appreciate the value of the audit report more. The requirement for disclosing key audit matters, such as the materiality thresholds, would force small audit firms to follow proper audit methodology. This would significantly reduce the workload of the quality assurance department of the Institute of Chartered Accountants of Bangladesh (ICAB), which, in its efforts to improve audit quality, periodically inspects the working papers of different audit firms. Mentioning the name of the actual engagement partner could also help improve the quality of audit reports, as individual audit partners would be more conscious of their reputation.
Overall, such extended disclosures could go a long way in allaying concerns of the investors, and perhaps more importantly, the regulatory bodies, who appear to be keen in controlling the profession through the establishment of the Financial Reporting Council (FRC). Arguably, the extended audit report format, if properly implemented, could achieve most of the objectives that the proposed FRC aims to achieve, without unnecessary bureaucratic burden this new regulatory body is likely to impose on the profession.  
Dr Javed Siddiqui teaches auditing and corporate governance at the Manchester Business School, University of Manchester, UK.  
javed.siddiqui@mbs.ac.uk