The company reporting season for the final quarter of 2022 will shortly begin. In company financials as currently presented, important matters that cast light on the behavior of senior company managers and their considerations in significant decisions are often obscured by professional jargon and a welter of numbers, and not every investor understands them completely. Such matters can be lost among the hundreds of detail-laden pages.
Under a new auditing standard, they will come under the spotlight. Starting from financial statements for periods ending on December 31, 2022, public company auditors will have to apply standard 701, which requires them to communicate "key matters in the audit" in the auditor’s report.
The new standard, which was published in February 2022, appears especially dramatic in the light of recent affairs in which defects were discovered in company financial statements, among them the embezzlement of tens of millions of shekels in Gibui Holdings, and the Unetcredit affair, in which company managers are suspected of stealing millions of shekels, forgery, money laundering, and other offences.
"Up to now, auditors would express an opinion on financial statements in uniform wording, The new standard means that in addition to the usual formula, an opinion must be recorded pointing out all the most significant matters that the auditor has encountered," explains Hofit Gotesdyner, a partner at accountants and consultants BDO Ziv Haft. "The additional new reporting will have a considerable effect on the companies being audited and on the way audits are conducted," she says.
What should go into the special report?
But how are "key matters" to be defined? Gotesdyner explains that for the time being the definition is flexible and is at the auditor’s discretion. Key matters, she says, are "all matters arising from the audit that were communicated, or should have been communicated, to bodies that supervise corporate governance (the Israel Securities Authority and other bodies that supervise public companies), according to the professional judgment of the auditor. Very significant matters in the audit of the financial statements for a given period will include, among other things, anything related, or that could be related, to items or material disclosures in the financial statements; and matters on which the exercise of the auditor’s judgment was especially challenging, subjective, or complex."
Comment on such significant matters has to be set out in a separate paragraph at the end of the auditor’s report, under the heading "Key matters in the audit". Each key matter will be described in a separate paragraph, with a suitable sub-heading.
"Auditors will have to be alert
But what if an auditor fails to spot a significant item, and does not report on it, and it then turns out that the item in question is the basis of fraud or deception?
Shlomi Shuv, head of the Accounting Program and deputy dean at Reichman University, describes the new standard as nothing less than a revolution, and makes clear that alongside greater transparency it places greater responsibility on auditors.
"The dramatic improvement in transparency of the work of the auditor vis-à-vis investors is a real revolution that has taken place in the past few years in global auditing standards. In my opinion, this will have substantial consequences below the surface for improvement of the work of auditing in Israel, but it will also affect auditors’ exposure. There is no getting away from it, transparency increases responsibility. It will now be possible to examine the work of an auditor, whether he focused on the right places and what audit procedures he used, since these too must be detailed. Just think how he will be attacked with hindsight in the event of a company collapse, or embezzlement, or the discovery of problems with the propriety of the financial statements.
"The change will oblige auditors to be alert, committed, and sharp, to plan audits better in the first place, and to identify the company’s risks accurately."
Published by Globes, Israel business news - en.globes.co.il - on January 19, 2023.
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