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A Time to Rise Collectively to the Challenge and Restore Confidence

Remarks by IAASB Chair Tom Seidenstein

Tom Seidenstein | Chair, International Auditing and Assurance Standards Board
Apr 13, 2020 | Institute of Chartered Accountants of India’s Virtual Conference | English

Impact of the COVID-19 Pandemic on Reporting and Assurance

Good morning from the Washington, DC, area, in the United States. I am honored to be invited to speak today. I thank the Institute and its leadership for organizing this conference. I greatly appreciate your efforts to galvanize the profession in its response to this truly global crisis. I look forward to hearing the remarks of the distinguished panelists.

My name is Tom Seidenstein, and I currently serve as chair of the International Auditing and Assurance Standards Board (the IAASB). I am sorry that my first formal interaction with the Indian Institute in my current role is under these circumstances. My hope is that in the not-so-distant future, we could meet in person, in much better times. For now, please accept my best wishes for the health and well-being of those attending the conference virtually, your families, and the broader communities in which you live and serve.

When I joined the IAASB nine months, I accepted this role with a core belief. Setting standards at the international level is the most effective way to respond to the relentless globalization of business and avoid the economic costs and regulatory arbitrage that come with a fragmentation in rules. Global approaches to global challenges. My belief in the value of global approaches remains firm. Of course, COVID-19 has created a global crisis, and the economy has been a major casualty.

In the brief time allocated to me, my remarks will focus on three areas:

  • First, working together on both national and international levels, standard-setters, regulators, accounting and audit practitioners, preparers, and other stakeholders can make a meaningful difference in helping the economy get back on its feet.
  • Second, the IAASB stands ready to support the public interest and the external reporting community. We will create targeted guidance, where appropriate, adapt our ways of working to be flexible to rapidly changing circumstances, and coordinate with key parties.
  • Third, a few areas of our standards merit special consideration by the profession. These include going concern, auditor reporting, and auditing estimates.

Rising to the challenge and Restoring Confidence

I am sure that at some point this crisis will become very personal for everyone. Maybe it will be the favorite local business that needs to shut its doors. Or maybe the neighbor who loses her job. Or a friend that sadly catches the virus. I am certain that we will all be touched.

I have been inspired by how people are responding to the crisis. It seems as if we are trying to do the best to help. I am here to say that all involved with the world of accounting and auditing have an important role to play.

This is not the challenge that I imagined facing in my first year. However, it is the one that we collectively face, and together we should rise to meet it.

Now more than ever, we need confidence to return in order to enable capital to flow freely again and the economy to grow. Where we sit, it is sometimes easy to get lost in the technicalities of accounting and standard setting.  However, at its best, the profession can play a critical role in ensuring trust and confidence in markets.

Auditors are responding by adapting their ways of working and utilizing remote techniques and technology. It is no time to relax the commitment to the public interest. For the profession, this means adhering to the highest ethical standards, communicating intensively with preparers and those charged with governance, and applying both professional judgment and skepticism.

I often say that the financial reporting world works in a highly connected ecosystem. Preparers of financial information, standard-setters, and regulators also need to each perform their role for the system to work. A weakness in any one part of the reporting ecosystem will have reverberations throughout.

Standard setters and regulators are adapting. We do so with the recognition that we are operating in a period of enormous uncertainty, and that all judgments, even if appropriately reasoned, documented, and communicated, will not always be right in hindsight. However, we can do our best to provide greater guidance, when possible, to those trying their best to comply with our standards and rules. Standard setters need to exhibit a sense of flexibility in terms of our work program priorities and imposing additional requirements on our stakeholders.

IAASB Standard-Setting Response: Calibrating, Reacting Agility, and Coordinating

We at the IAASB are trying to practice what we preach. Our response is three-pronged:

  1. We are calibrating our existing program to prioritize our COVID-19 response and other leading public interest issues on our work plan, including our Quality Management work, Going Concern and Fraud, and efforts aimed at reducing complexity for Less Complex Entities. I will discuss some of our specific COVID-19 guidance shortly.
  2. We are embracing technology, as others are, to advance these priority projects and will be appropriately flexible when it comes to our previous agreed timelines. For example, we are about to publish our Exposure Draft on Group Audits. We have already agreed to an extended comment period. At our upcoming meeting in June, to be conducted via videoconference, we will discuss the impact of the current crisis on other work and effective dates.
  3. We are coordinating with national audit standard-setters, securities regulators, independent audit regulators, the International Accounting Standards Board, and professional bodies, particularly via IFAC. Our aim is to share information and discuss how we are individually responding to the crisis. We are successfully identifying areas where more work is needed and hoping to avoid redundant or confusing efforts.

Areas of IAASB Focus to Help

A minute earlier, I mentioned that the IAASB is developing guidance in the form of Staff Alerts to help the profession to better apply our standards. These Staff Alerts do not change the requirements of the standards. The Alerts highlight specific areas of focus under the current environment. The IAASB has already published, on its Website, a general Staff Alert aimed at broader considerations. We are developing five more on Going Concern, Auditor Reporting, the Audit of Accounting Estimates, special considerations for public sector auditors, and subsequent events.

Let me touch on Going Concern, Auditor Reporting, and Audit of Accounting Estimates and give you a preview on what we expect to cover in our upcoming Staff Alerts. These three areas are the topics that come up most in my discussions. First, we believe our principles-based standards are robust enough to be adapted to the current environment, where there is a focus on uncertainty and judgment. We also need to keep in context the responsibilities of auditors (vis-à-vis the responsibilities of management) – neither of which is easy in these uncertain and unknown times.

In terms of going concern, our focus is on the auditor’s understanding of management’s process for meeting the requirements of the applicable financial reporting framework. That understanding will help the auditor determine whether what management’s presentation of the financial information in the financial statement is fine, whether highlighting something in the auditor’s report is needed, or whether further modification (such as a qualification or a disclaimer) is required.

We know in many instances this will be challenging, particularly where it is a ‘close call.’ We cannot mandate when modifications to the auditor’s report may or may not be needed (the standards set out what needs to be done). We do encourage a heightened sense of professional skepticism when undertaking this work.

Auditors can use Auditor Reporting as another way to enhance confidence in external reporting, including in areas such as going concern. Our standards set out circumstances when an emphasis of matter is needed or another modification, including qualification, disclaimer, or an adverse opinion. There may be considerably more circumstances now where modification may be needed. In-ki alluded to various scenarios where there may be issues around gathering audit evidence. In some cases, alternative procedures may provide what is needed; in other cases, the auditor may need to consider the impact on the auditor’s report.

Disclosure by management takes on ever increasing importance in these unprecedented times. While it will depend on the circumstances, I expect that users would expect increasing transparency related to current business risks and mitigation strategies. These disclosures will also support the work of auditors. Auditors should then focus on the relevant requirements in the financial reporting standards to ensure that appropriate and necessary disclosures are made and their impact on the auditor’s report. One area to provide further transparency is Key Audit Matters (KAMs) where they are used under ISAs. Particularly for listed companies, KAMs may play an important role in enhancing the information of the auditor’s report relating to matter that, although resolved, required significant auditor attention. KAMs may also be a useful way of highlighting some of the uncertainty and judgment needed by the auditor.

Finally, we expect the audit of accounting estimates to become even more important over the coming months. The IAASB cannot emphasize enough the need for a heightened professional skepticism when auditing accounting estimates. Our newly revised ISA 540 helps the auditor home in on those specific inherent risks attached to estimation uncertainty. The standards and our forthcoming guidance also highlight other inherent risk factors that need to be considered, even more so now. The reality is that last year’s approach may not work for the current circumstances. We expect disclosures of estimates to be a focus for auditors, as is the testing of controls.

Towards Better, More Confident Days

I have outlined the IAASB’s initial response to the crisis. I say initial response, because I know that there will be twist and turns. Through our coordination efforts, we know that we will need to adapt. However, I wish to convey that the IAASB is ready to play its role in helping to rebuild confidence in the global economy. The coming days, weeks, and maybe even months will inevitably be challenging. I am pleased that we stand well positioned to do our small part.