Twas brillig, and the slithy toves
Did gyre and gimble in the wabe:
All mimsy were the borogroves,
And the mome raths outgrabe.
How fitting, that the Victorian era in which the independent auditor’s report was invented also brought forth Charles Dodgson’s unique combination of mathematical genius and – as Lewis Carroll of Jabberwocky – his verbal acrobatics.
So I thought, reading the new language requirements of the Financial Reporting Council, the British audit regulator, in its revised ISA 700, “The independent auditor’s report on financial statements”.
Life was once so straightforward. In the 19th century, Mr. Deloitte’s pioneering report on the half-yearly accounts of the Great Western Railway at December 31, 1850 read, in its crisp entirety, “Audited and approved”.
This month, while the Public Company Audit Oversight Board in the US, the European Commission in Brussels and the International Auditing and Assurance Standards Board on the global front continue mired in endless projects aspiring to evolve the standard report, the FRC’s vorpal sword has gone snicker-snack.
It strikes one successful blow, at least – against one of financial reporting’s great historical opacities. The new British ISA requires that the audit report’s description of the assessed risk of material misstatement must:
“Provide an explanation of how the auditor applied the concept of materiality in planning and performing the audit. Such explanation shall specify the threshold used by the auditor as being materiality for the financial statements as a whole…” (emphasis added).
It has forever been a mystery why financial statement users have tolerated a reporting and assurance model, the scope of which is designed “to give reasonable assurance that the financial statements are free from material misstatement…”, without a clue from either issuers or auditors as to the magnitude or contours of the term “material.”
At last bringing sunlight and transparency to the question of “how big is big?”, the ISA invites specific amplification, for example, of categories of items having lower materiality levels, materiality thresholds for reporting unadjusted differences to the audit committee, and qualitative considerations relating to the auditor’s evaluation of materiality (¶ A13B).
In the disclosure-oriented environment of the American securities laws, it would seem plain beyond ambiguity that putting such information in the hands of investors is to welcome them into the circle of the better-informed – with, no small matter, a concomitant imposition of responsibility for their own absorption and analysis of the information.
That’s on the plus side. Not so promising, the requirement that an unqualified auditor’s report – which must “clearly state that the financial statements give a true and fair view” (¶ 18) – explicate the assessed risks, materiality and audit scope, in language that must be “related directly to the specific circumstances of the audited entity and … not, therefore, generic or abstract matters expressed in standardized language” (emphasis added).
Charles Dodgson may have been able to integrate quantitative and verbal competence back in 1872. But expecting linguistic agility from today’s number-crunchers is a stretch too far.
For proof, the FRC’s own admonition on risk disclosure (¶ 19(A)(a)) is a sufficient example, as it stumbles in ponderous violation of the norms of style, punctuation and syntax:
“Describe those assessed risks of material misstatement that were identified by the auditor and which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team…”
A better idea would be to tap the centuries of exquisite poetry and soaring rhetoric in the country’s grand verbal heritage. The phrase “true and fair view” has always seemed, after all, to resonate in its English-ness – as if any issues of clarity or sufficiency should be subject to gentlemanly resolution on the playing fields or over brandy and cigars in the lounge back at the club.
So here would be a few precedential examples for a descriptive accounting and audit vocabulary in non-generic, non-standardized terms:
- On the deferral of executive incentive compensation: “The rule is jam tomorrow and jam yesterday but never jam today.”
- On the difficulties of a protracted corporate reorganization: “Now is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.”
- On the impending threat of a bankruptcy filing: “It was a dark and stormy night.”
- On the choice of aggressive accounting principles by which to value a derivatives portfolio: “I know a bank where the wild thymes blow.”
- And, perhaps best of all, on the possibility of a going-concern qualification: “To be, or not to be: that is the question.”
Readers are invited and encouraged to bring forward their own suggestions.
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