Out with the Old – Professional Reflections on 2016Jan 05, 2017
Crowe Horwath International Accounting & Audit Director David Chitty looks back at 2016.
Looking back at 2016 several apparently unconnected professional developments are likely to result in significant improvements in the transparency of corporate reporting in the years to come. These result from a new accounting standard, the strategy for developing auditing standards, the focus on non-financial reporting and the implementation of new regulation in the European Union (EU).
IFRS 16 Leases was issued, marking the end of a debate about the future of lease accounting that went back to at least 1999. When implemented, IFRS 16 will abolish operating leases. Virtually all leased assets will be presented on the balance sheet. The days of structuring lease contracts to keep debt off the balance sheet will be over, marking the end of another off balance sheet financing practice. IFRS 16 has another significance. It is the last significant new accounting standard for the foreseeable future. Currently no new standards addressing "big themes" are being developed.
In 2016 the IAASB (International Audit & Assurance Standards Board) completed the consultation on Enhancing Audit Quality, the first stage of the most significant review of auditing standards since the completion of the Clarity Project in 2008. The consultation covered audit quality, professional scepticism and the audit of groups. IAASB has also been consulting on the audit of accounting estimates and beginning a review of the assessment of audit risk. The aim is to keep auditing standards "fit for purpose". Much has changed in audit practice since 2008, including the impact of the global financial crisis, significant enhancements in professional oversight and regulation, and major developments in technology. Audit is important for society, and all parties interested in robust financial statement audit should follow and comment on the IAASB's continuing projects.
2016 was a year in which non-financial reporting (NFR) received real attention. NFR is about reporting objectives, strategy and the delivery of value added. A EU Directive was finalised that will lead to a significant number of larger European companies presenting NFR. Reporting frameworks such as Integrated Reporting and approaches to sustainability reporting such as GRI have received more attention. Combining financial and non-financial reports has significant benefits for transparency and understandability. There are currently too many frameworks and hopefully the best features can be combined resulting in a common accepted approach.
In June 2016 the EU Audit Regulation and Directive came into law. The EU legislation was developed to respond to the lessons of the financial crisis. The legislation contains headline grapping features such as the mandatory rotation of audit firms and significant prohibitions and restrictions on the delivery of non-audit services by auditors. There are many other features of the legislation that will have a lasting impact. There will be greater convergence in the EU of the practice, conduct and oversight of audit, and also in the approach to corporate governance. It will be easier for auditors to work across borders in the EU, as the legislation paves the way to a single market in audit services. There is a wider impact of the EU legislation. It is influencing audit legislation, and therefore ultimately auditing practice, in countries outside the EU.
A companion article In with the New - Professional Expectations for 2017 will be published on Monday, 9 January 2017